The Company's application software includes iLife ®, iWork Ⓡ and various other software, including Final Cut Pro ®, Logic ® Pro X and FileMaker ® Pro. iLife is
the Company's consumer-oriented digital lifestyle software application suite included with all Mac computers and features iMovie Ⓡ, a digital video editing
application, and GarageBand ®, a music creation application that allows users to play, record and create music. iWork is the Company's integrated productivity
suite included with all Mac computers and is designed to help users create, present and publish documents through Pages®, presentations through Keynote Ⓡ
and spreadsheets through Numbers ® . The Company also has Multi-Touch versions of iLife and iWork applications designed specifically for use on iOS devices,
which are available as free downloads for all new iPhones and iPads.
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Table of Contents
This Annual Report on Form 10-K ("Form 10-K") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995,
that involve risks and uncertainties. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." 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," "will," "would,” “could,” “can,” “may,” and similar terms. Forward-looking
statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading
"Risk Factors," which are incorporated herein by reference. 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.
PART I
Item 1.
Business
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, OS X ® and
watchOS™ operating systems, iCloud Ⓡ, Apple Pay Ⓡ and a variety of accessory, service and support offerings. In September 2015, the Company announced a
new Apple TV, tvOS TM operating system and Apple TV App Store Ⓡ, which are expected to be available by the end of October 2015. The Company sells and
delivers digital content and applications through the iTunes Store Ⓡ, App Store, Mac App Store, iBooks Store TM and Apple Music TM (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. The Company's fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company is a
California corporation established in 1977.
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 and Apple Watch 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 high-quality 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.
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Apple Inc. | 2015 Form 10-K | 1
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Part IV
Item 15.
Exhibits, Financial Statement Schedules
Page
18
18
18
1
- ∞ ∞ ∞ ∞ ∞
8
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23
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Item 13.
Item 14.
Table of Contents
The Company manages its business primarily on a geographic basis. In 2015, the Company changed its reportable operating segments as management began
reporting business performance and making decisions primarily on a geographic basis, including the results of its retail stores in each respective geographic
segment. Accordingly, 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 each reportable operating segment provides similar hardware and software products and similar
services, they are 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 may be found in Part II, Item 7 of this Form 10-K under the
subheading "Segment Operating Performance," and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment
Information and Geographic Data."
Internet Services
The iTunes Store, available for iOS devices, Mac and Windows personal computers and Apple TV, allows customers to purchase and download music and TV
shows, rent or purchase movies and download free podcasts. The App Store, available for iOS devices, allows customers to discover and download apps and
purchase in-app content. The Mac App Store, available for Mac computers, allows customers to discover, download and install Mac applications. The iBooks
Store, available for iOS devices and Mac computers, features e-books from major and independent publishers. Apple Music offers users a curated listening
experience with on-demand radio stations that evolve based on a user's play or download activity and a subscription-based internet streaming service that also
provides unlimited access to the Apple Music library. In September 2015, the Company announced the Apple TV App Store, which provides customers access to
apps and games specifically for the new Apple TV.
iCloud
iCloud is the Company's cloud service which stores music, photos, contacts, calendars, mail, documents and more, keeping them up-to-date and available
across multiple iOS devices, Mac and Windows personal computers and Apple TV. iCloud services include iCloud Drive SM, iCloud Photo Library, Family
Sharing, Find My iPhone, Find My Friends, Notes, iCloud Keychain Ⓡ and iCloud Backup for iOS devices.
AppleCare
AppleCare® offers a range of support options for the Company's customers. These include assistance that is built into software products, printed and electronic
product manuals, online support including comprehensive product information as well as technical assistance, the AppleCare Protection Plan ("APP”) and the
AppleCare+ Protection Plan ("AC+"). APP is a fee-based service that typically extends the service coverage of phone support, hardware repairs and dedicated
web-based support resources for Mac, Apple TV and display products. AC+ is a fee-based service offering additional coverage under some circumstances for
instances of accidental damage in addition to the services offered by APP and is available in certain countries for iPhone, iPad, Apple Watch and iPod.
Apple Pay
Apple Pay is the Company's mobile payment service available in the U.S. and U.K. that offers an easy, secure and private way to pay. Apple Pay allows users to
pay for purchases in stores accepting contactless payments and to pay for purchases within participating apps on qualifying devices. Apple Pay accepts credit
and debit cards across major card networks and also supports reward programs and store-issued credit and debit cards.
Apple Inc. | 2015 Form 10-K | 3
Table of Contents
Other Products
Accessories
The Company sells a variety of Apple-branded and third-party Mac-compatible and iOS-compatible accessories, including Apple TV, Apple Watch, headphones,
displays, storage devices, Beats products, and various other connectivity and computing products and supplies.
Apple TV
Apple TV connects to consumers' TVs and enables them to access digital content directly for streaming high definition video, playing music and games, and
viewing photos. Content from Apple Music and other media services are also available on Apple TV. Apple TV allows streaming digital content from Mac and
Windows personal computers through Home Share and through AirPlay Ⓡ from compatible Mac and iOS devices. In September 2015, the Company announced
the new Apple TV running on the Company's tvOS operating system and based on apps built for the television. Additionally, the new Apple TV remote features
Siri, allowing users to search and access content with their voice. The new Apple TV is expected to be available at the end of October 2015.
Apple Watch
Apple Watch is a personal electronic device that combines the watchOS user interface and technologies created specifically for a smaller device, including the
Digital Crown, a unique navigation tool that allows users to seamlessly scroll, zoom and navigate, and Force Touch, a technology that senses the difference
between a tap and a press and allows users to access controls within apps. Apple Watch enables users to communicate in new ways from their wrist, track their
health and fitness through activity and workout apps, and includes Siri and Apple Pay.
Services
Business Organization
Application Software
tvOS
Products
iPhone
iPhone is the Company's line of smartphones based on its iOS operating system. iPhone includes Siri ®, a voice activated intelligent assistant, and Apple Pay
and Touch IDT on qualifying devices. In September 2015, the Company introduced iPhone 6s and 6s Plus, featuring 3D Touch, which senses force to access
features and interact with content and apps. iPhone works with the iTunes Store, App Store and iBooks Store for purchasing, organizing and playing digital
content and apps. iPhone is compatible with both Mac and Windows personal computers and Apple's iCloud services, which provide synchronization across
users' devices.
iPad
iPad is the Company's line of multi-purpose tablets based on its iOS operating system, which includes iPad Air Ⓡ and iPad mini TM. iPad includes Siri and also
includes Touch ID on qualifying devices. In September 2015, the Company announced the new iPad Pro™, featuring a 12.9-inch Retina Ⓡ display, which is
expected to be available in November 2015. iPad works with the iTunes Store, App Store and iBooks Store for purchasing, organizing and playing digital content
and apps. iPad is compatible with both Mac and Windows personal computers and Apple's iCloud services.
Mac
Mac is the Company's line of desktop and portable personal computers based on its OS X operating system. The Company's desktop computers include iMac ®
21.5" iMac with Retina 4K Display, 27" iMac with Retina 5K Display, Mac Pro ® and Mac mini. The Company's portable computers include MacBook Ⓡ
MacBook Air Ⓡ, MacBook Pro ® and MacBook Pro with Retina display.
,
Operating System Software
iOS
'
iOS is the Company's Multi-Touch TM operating system that serves as the foundation for iOS devices. Devices running iOS are compatible with both Mac and
Windows personal computers and Apple's iCloud services. In September 2015, the Company released iOS 9, which provides more search abilities and improved
Siri features. iOS 9 also introduced new multitasking features designed specifically for iPad, including Slide Over and Split View, which allow users to work with
two apps simultaneously, and Picture-in-Picture that allows users to watch a video while using another application.
OS X
OS X is the Company's Mac operating system and is built on an open-source UNIX-based foundation and provides an intuitive and integrated computer
experience. Support for iCloud is built into OS X so users can access content and information from Mac, iOS devices and other supported devices and access
downloaded content and apps from the iTunes Store. OS X El Capitan, released in September 2015, is the 12 th major release of OS X and incorporates
additional window management features, including Split View and the new Spaces Bar in Mission Control ®, which provides users an intuitive way to group
applications.
Apple Inc. | 2015 Form 10-K | 2
Table of Contents
watchOS
watchOS is the Company's operating system for Apple Watch. Released in September 2015, watchOS 2 is the first major software update for Apple Watch,
providing users with new features, including new watch faces, the ability to add third-party app information on watch faces, Time Travel, and additional
communication capabilities in Mail, Friends and Digital Touch. watchOS 2 also gives developers the ability to build native apps for Apple Watch.
In September 2015, the Company announced tvOS, its operating system for the new Apple TV, which is expected to be available at the end of October 2015.
The tvOS operating system is based on the Company's iOS platform and will enable developers to create new apps and games specifically for Apple TV and
deliver them to customers through the new Apple TV App Store.
iPod
Item 12.
Item 11.
1.625% Notes due 2026
3.05% Notes due 2029
3.60% Notes due 2042
94-2404110
(I.R.S. Employer Identification No.)
95014
(Zip Code)
The NASDAQ Stock Market LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
(Name of exchange on which registered)
1.375% Notes due 2024
2.000% Notes due 2027
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☑ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐
No ☑
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ☑
1.000% Notes due 2022
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.
Common Stock, $0.00001 par value per share
(408) 996-1010
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 26, 2015
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
(State or other jurisdiction of incorporation or organization)
1 Infinite Loop
Cupertino, California
(Address of principal executive offices)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Executive Compensation
Large accelerated filer ☑
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
No ☑
Mine Safety Disclosures
Part II
Item 5.
Item 6.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Item 7.
Item 7A.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Item 9A.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Item 9B.
Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 4.
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Legal Proceedings
Properties
Yes ☐
Accelerated filer
Smaller reporting company
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of March 27, 2015, the last business day of the Registrant's most
recently completed second fiscal quarter, was approximately $709,923,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and
directors of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as
affiliates is not necessarily a conclusive determination for any other purposes.
5,575,331,000 shares of common stock were issued and outstanding as of October 9, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement relating to its 2016 annual meeting of shareholders (the “2016 Proxy Statement") are incorporated by reference into Part
Ill of this Annual Report on Form 10-K where indicated. The 2016 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the
end of the fiscal year to which this report relates.
Table of Contents
Apple Inc.
Form 10-K
For the Fiscal Year Ended September 26, 2015
TABLE OF CONTENTS
Part I
Item 1.
Item 1A.
Item 1B.
Business
Risk Factors
Unresolved Staff Comments
Item 2.
Item 3.
(Mark One)
iPod is the Company's line of portable digital music and media players, which includes iPod touch, iPod nano ® and iPod shuffle ®. All iPods work with iTunes to
purchase and synchronize content. iPod touch, based on the Company's iOS operating system, is a flash-memory-based iPod that works with the iTunes Store,
App Store and iBooks Store for purchasing and playing digital content and apps.
The Company's developer programs support app developers with building, testing and distributing apps for iOS, Mac, Apple Watch and the new Apple TV.
Developer program membership provides access to beta software, the ability to integrate advanced app capabilities (e.g., iCloud, Game Center and Apple Pay),
distribution on the App Store, access to App Analytics, and code-level technical support. Developer programs also exist for businesses creating apps for internal
use (the Apple Developer Enterprise Program) and developers creating accessories for Apple devices (the MFi Program). All developers, even those who are
not developer program members, can sign in with their Apple ID to post on the Apple Developer Forums and use Xcode Ⓡ, the Company's integrated
development environment for creating apps for Apple platforms. Xcode includes project management tools; analysis tools to collect, display and compare app
performance data; simulation tools to locally run, test and debug apps; and tools to simplify the design and development of user interfaces. All developers also
have access to extensive technical documentation and sample code.
Table of Contents
While some Mac computers are manufactured in the U.S. and Ireland, substantially all of the Company's hardware products are currently manufactured by
outsourcing partners that are located primarily in Asia. The supply and manufacture of a number of components is performed by sole-sourced outsourcing
partners in the U.S., Asia and Europe. Margins on sales of the Company's products in foreign countries and on sales of products that include components
obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade regulations, including tariffs
and antidumping penalties. Information regarding concentration in the available sources of supply of materials and products is set forth in Part II, Item 8 of this
Form 10-K in the Notes to Consolidated Financial Statements in Note 10, "Commitments and Contingencies."
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.
Warranty
The Company offers a limited parts and labor warranty on most of its hardware products. The basic warranty period is typically one year from the date of
purchase by the original end-user. The Company also offers a 90-day basic warranty for its service parts used to repair the Company's hardware products. In
certain jurisdictions, local law requires that manufacturers guarantee their products for a period prescribed by statute, typically at least two years. In addition,
where available, consumers may purchase APP or AC+, which extends service coverage on many of the Company's hardware products.
Backlog
In the Company's experience, the actual amount of product backlog at any particular time is not a meaningful indication of its future business prospects. In
particular, backlog often increases immediately following new product introductions as customers anticipate shortages. Backlog is often reduced once customers
believe they can obtain sufficient supply. Because of the foregoing, backlog should not be considered a reliable indicator of the Company's ability to achieve any
particular level of revenue or financial performance.
Employees
As of September 26, 2015, the Company had approximately 110,000 full-time equivalent employees.
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 Securities and Exchange Commission (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 these websites are not incorporated into this filing.
Further, the Company's references to website URLs are intended to be inactive textual references only.
Apple Inc. | 2015 Form 10-K | 7
Table of Contents
Item 1A.
Risk Factors
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form
10-K. The following information should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including
but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company's actual financial condition and operating
results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially
and adversely affect the Company's business, financial condition, operating results and stock price.
Because of the following factors, as well as other factors affecting the Company's financial condition and operating results, past financial performance should not
be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Global and regional economic conditions could materially adversely affect the Company.
The Company's operations and performance depend significantly on global and regional economic conditions. Uncertainty about global and regional economic
conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, higher unemployment, financial market volatility,
government austerity programs, negative financial news, declines in income or asset values and/or other factors. These worldwide and regional economic
conditions could have a material adverse effect on demand for the Company's products and services. Demand also could differ materially from the Company's
expectations as a result of currency fluctuations because the Company generally raises prices on goods and services sold outside the U.S. to correspond with
the effect of a strengthening of the U.S. dollar. Other factors that could influence worldwide or regional demand include changes in fuel and other energy costs,
conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit, consumer confidence and other
macroeconomic factors affecting consumer spending behavior. These and other economic factors could materially adversely affect demand for the Company's
products and services.
In the event of financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry, or significant
financial service institution failures, there could be tightening in the credit markets, low liquidity and extreme volatility in fixed income, credit, currency and equity
markets. This could have a number of effects on the Company's business, including the insolvency or financial instability of outsourcing partners or suppliers or
their inability to obtain credit to finance development and/or manufacture products resulting in product delays; inability of customers, including channel partners,
to obtain credit to finance purchases of the Company's products; failure of derivative counterparties and other financial institutions; and restrictions on the
Company's ability to issue new debt. Other income and expense also could vary materially from expectations depending on gains or losses realized on the sale
or exchange of financial instruments; impairment charges resulting from revaluations of debt and equity securities and other investments; changes in interest
rates; increases or decreases in cash balances; volatility in foreign exchange rates; and changes in fair value of derivative instruments. Increased volatility in the
financial markets and overall economic uncertainty would increase the risk of the actual amounts realized in the future on the Company's financial instruments
differing significantly from the fair values currently assigned to them.
Global markets for the Company's products and services are highly competitive and subject to rapid technological change, and the Company may be
unable to compete effectively in these markets.
The Company's products and services compete in highly competitive global markets characterized by aggressive price cutting and resulting downward pressure
on gross margins, frequent introduction of new products, short product life cycles, evolving industry standards, continual improvement in product
price/performance characteristics, rapid adoption of technological and product advancements by competitors and price sensitivity on the part of consumers.
The Company's ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of innovative new products, services
and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its products, including the
hardware, operating system, numerous software applications and related services. As a result, the Company must make significant investments in R&D. The
Company currently holds a significant number of patents and copyrights and has registered and/or has applied to register numerous patents, trademarks and
service marks. In contrast, many of the Company's competitors seek to compete primarily through aggressive pricing and very low cost structures, and
emulating the Company's products and infringing on its intellectual property. If the Company is unable to continue to develop and sell innovative new products
with attractive margins or if competitors infringe on the Company's intellectual property, the Company's ability to maintain a competitive advantage could be
adversely affected.
Apple Inc. | 2015 Form 10-K | 8
Developer Programs
Apple Inc. | 2015 Form 10-K | 6
During 2015, the Company's domestic and international net sales accounted for 35% and 65%, respectively, of total net sales. Information regarding financial
data by geographic segment is set forth in Part II, Item 7 of this Form 10-K under the subheading "Segment Operating Performance," and in Part II, Item 8 of this
Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data."
☑
Many of the Company's products are designed to include intellectual property obtained from third parties. It may be necessary in the future to seek or renew
licenses relating to various aspects of its products, processes and services. While the Company has generally been able to obtain such licenses on commercially
reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future on reasonable terms or at all. Because of technological
changes in the industries in which the Company competes, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible that
certain components of the Company's products, processes and services may unknowingly infringe existing patents or intellectual property rights of others. From
time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties.
Foreign and Domestic Operations and Geographic Data
The Company believes that sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value of the
hardware and software integration and demonstrate the unique solutions that are available on its products. The Company further believes providing direct
contact with its targeted customers is an effective way to demonstrate the advantages of its products over those of its competitors and providing a high-quality
sales and after-sales support experience is critical to attracting new and retaining existing customers.
To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company continues to build and improve its
distribution capabilities by expanding the number of its own retail stores worldwide. The Company's retail stores are typically located at high-traffic locations in
quality shopping malls and urban shopping districts. By operating its own stores and locating them in desirable high-traffic locations the Company is better
positioned to ensure a high quality customer buying experience and attract new customers. The stores are designed to simplify and enhance the presentation
and marketing of the Company's products and related solutions. The retail stores employ experienced and knowledgeable personnel who provide product
advice, service and training and offer a wide selection of third-party hardware, software and other accessories that complement the Company's products.
Apple Inc. | 2015 Form 10-K | 4
Table of Contents
The Company has also invested in programs to enhance reseller sales by placing high-quality Apple fixtures, merchandising materials and other resources within
selected third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus on the Apple platform by providing a high
level of product expertise, integration and support services.
The Company is committed to delivering solutions to help educators teach and students learn. The Company believes effective integration of technology into
classroom instruction can result in higher levels of student achievement and has designed a range of products, services and programs to address the needs of
education customers. The Company also supports mobile learning and real-time distribution of, and access to, education related materials through iTunes U, a
platform that allows students and teachers to share and distribute educational media online. The Company sells its products to the education market through its
direct sales force, select third-party resellers and its online and retail stores.
The Company also sells its hardware and software products to enterprise and government customers in each of its reportable operating segments. The
Company's products are deployed in these markets because of their performance, productivity, ease of use and seamless integration into information technology
environments. The Company's products are compatible with thousands of third-party business applications and services, and its tools enable the development
and secure deployment of custom applications as well as remote device administration.
No single customer accounted for more than 10% of net sales in 2015, 2014 or 2013.
Competition
The markets for the Company's products and services are highly competitive and the Company is confronted by aggressive competition in all areas of its
business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities
and use of mobile communication and media devices, personal computers and other digital electronic devices. The Company's competitors that sell mobile
devices and personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market
share. The Company's financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross
margins. Principal competitive factors important to the Company include price, product features (including security features), relative price and performance,
product quality and reliability, design innovation, a strong third-party software and accessories ecosystem, marketing and distribution capability, service and
support and corporate reputation.
The Company is focused on expanding its market opportunities related to personal computers and mobile communication and media devices. These markets are
highly competitive and include many large, well-funded and experienced participants. The Company expects competition in these markets to intensify
significantly as competitors attempt to imitate some of the features of the Company's products and applications within their own products or, alternatively,
collaborate with each other to offer solutions that are more competitive than those they currently offer. These markets are characterized by aggressive pricing
practices, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by
competitors and price sensitivity on the part of consumers and businesses.
The Company's digital content services have faced significant competition from other companies promoting their own digital music and content products and
services, including those offering free peer-to-peer music and video services.
The Company's future financial condition and operating results depend on the Company's ability to continue to develop and offer new innovative products and
services in each of the markets in which it competes. The Company believes it offers superior innovation and integration of the entire solution including the
hardware (iOS devices, Mac, Apple Watch and Apple TV), software (iOS, OS X, watchOS and tvOS), online services and distribution of digital content and
applications (Internet Services). Some of the Company's current and potential competitors have substantial resources and may be able to provide such products
and services at little or no profit or even at a loss to compete with the Company's offerings.
The Company's customers are primarily in the consumer, small and mid-sized business, education, enterprise and government markets. The Company sells its
products and resells third-party products in most of its major markets directly to consumers and small and mid-sized businesses through its retail and online
stores and its direct sales force. The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers,
retailers and value-added resellers. During 2015, the Company's net sales through its direct and indirect distribution channels accounted for 26% and 74%,
respectively, of total net sales.
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 regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing thousands of
patent applications around the world. Over time, the Company has accumulated a large portfolio of issued patents around the world. The Company holds
copyrights relating to certain aspects of its products and services. No single patent or copyright is solely responsible for protecting the Company's products. The
Company believes the duration of its patents is adequate relative to the expected lives of its products.
Supply of Components
The Company currently holds rights to patents and copyrights relating to certain aspects of its hardware devices, accessories, software and services. The
Company has registered or has applied for trademarks and service marks in the U.S. and a number of foreign countries. Although the Company believes the
ownership of such patents, copyrights, trademarks and service marks is an important factor in its business and that its success does depend in part on such
ownership, the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.
Patents, Trademarks, Copyrights and Licenses
Because the industries in which the Company competes are characterized by rapid technological advances, the Company's ability to compete successfully
depends heavily upon its ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. The Company
continues to develop new technologies to enhance existing products and to expand the range of its product offerings through R&D, licensing of intellectual
property and acquisition of third-party businesses and technology. Total R&D expense was $8.1 billion, $6.0 billion and $4.5 billion in 2015, 2014 and 2013,
respectively.
Research and Development
Markets and Distribution
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.
While some Mac computers are manufactured in the U.S. and Ireland, substantially all of the Company's hardware products are currently 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.
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Apple Inc. | 2015 Form 10-K | 5
The Company uses some custom components that are not commonly used by its competitors, and the Company often utilizes 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 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's stock price has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the Company, the
technology industry and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that
may have been unrelated to these companies' operating performance. Price volatility over a given period may cause the average price at which the Company
repurchases its own stock to exceed the stock's price at a given point in time. The Company believes its stock price should reflect expectations of future growth
and profitability. The Company also believes its stock price should reflect expectations that its cash dividend will continue at current levels or grow and that its
current share repurchase program will be fully consummated. Future dividends are subject to declaration by the Company's Board of Directors, and the
Company's share repurchase program does not obligate it to acquire any specific number of shares. If the Company fails to meet expectations related to future
growth, profitability, dividends, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse
impact on investor confidence and employee retention.
The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve significant risks and
uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return of capital and
unidentified issues not discovered in the Company's due diligence. These new ventures are inherently risky and may not be successful.
The Company's business and reputation may be impacted by information technology system failures or network disruptions.
The Company may be subject to information technology system failures and network disruptions. These may be caused by natural disasters, accidents, power
disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions. System
redundancy may be ineffective or inadequate, and the Company's disaster recovery planning may not be sufficient for all eventualities. Such failures or
disruptions could, among other things, prevent access to the Company's online stores and services, preclude retail store transactions, compromise Company or
customer data, and result in delayed or cancelled orders. System failures and disruptions could also impede the manufacturing and shipping of products,
delivery of online services, transactions processing and financial reporting.
There may be breaches of the Company's information technology systems that materially damage business partner and customer relationships,
curtail or otherwise adversely impact access to online stores and services, or subject the Company to significant reputational, financial, legal and
operational consequences.
The Company's business requires it to use and store customer, employee and business partner personally identifiable information ("PII”). This may include,
among other information, names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers and payment account
information. Although malicious attacks to gain access to PII affect many companies across various industries, the Company is at a relatively greater risk of
being targeted because of its high profile and the amount of PII it manages.
The Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption and authentication
technologies designed to secure the transmission and storage of data and prevent access to Company data or accounts. As with all companies, these security
measures are subject to third-party security breaches, employee error, malfeasance, faulty password management, or other irregularities. For example, third
parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be
used to access the Company's information technology systems. To help protect customers and the Company, the Company monitors accounts and systems for
unusual activity and may freeze accounts under suspicious circumstances, which may result in the delay or loss of customer orders.
Apple Inc. | 2015 Form 10-K | 14
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The Company devotes significant resources to network security, data encryption and other security measures to protect its systems and data, but these security
measures cannot provide absolute security. To the extent the Company was to experience a breach of its systems and was unable to protect sensitive data,
such a breach could materially damage business partner and customer relationships, and curtail or otherwise adversely impact access to online stores and
services. Moreover, if a computer security breach affects the Company's systems or results in the unauthorized release of PII, the Company's reputation and
brand could be materially damaged, use of the Company's products and services could decrease, and the Company could be exposed to a risk of loss or
litigation and possible liability. While the Company maintains insurance coverage that, subject to policy terms and conditions and subject to a significant self-
insured retention, is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that
may arise in the continually evolving area of cyber risk.
The Company's business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
The Company is subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws
apply not only to third-party transactions, but also to transfers of information between the Company and its subsidiaries, and among the Company, its
subsidiaries and other parties with which the Company has commercial relations. Several jurisdictions have passed laws in this area, and other jurisdictions are
considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging
and changing international requirements may cause the Company to incur substantial costs or require the Company to change its business practices.
Noncompliance could result in penalties or significant legal liability.
The Company's privacy policy, which includes related practices concerning the use and disclosure of data, is posted on its website. Any failure by the Company,
its suppliers or other parties with whom the Company does business to comply with its posted privacy policy or with other federal, state or international privacy-
related or data protection laws and regulations could result in proceedings against the Company by governmental entities or others.
The Company is also subject to payment card association rules and obligations under its contracts with payment card processors. Under these rules and
obligations, if information is compromised, the Company could be liable to payment card issuers for associated expenses and penalties. In addition, if the
Company fails to follow payment card industry security standards, even if no customer information is compromised, the Company could incur significant fines or
experience a significant increase in payment card transaction costs.
The Company's success depends largely on the continued service and availability of key personnel.
The Company's financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
Much of the Company's future success depends on the continued availability and service of key personnel, including its Chief Executive Officer, executive team
and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially
in Silicon Valley, where most of the Company's key personnel are located.
The Company's business may be impacted by political events, war, terrorism, public health issues, natural disasters and other business
interruptions.
War, terrorism, geopolitical uncertainties, public health issues and other business interruptions have caused and could cause damage or disruption to
international commerce and the global economy, and thus could have a material adverse effect on the Company, its suppliers, logistics providers, manufacturing
vendors and customers, including channel partners. The Company's business operations are subject to interruption by, among others, natural disasters, whether
as a result of climate change or otherwise, fire, power shortages, nuclear power plant accidents, terrorist attacks and other hostile acts, labor disputes, public
health issues and other events beyond its control. Such events could decrease demand for the Company's products, make it difficult or impossible for the
Company to make and deliver products to its customers, including channel partners, or to receive components from its suppliers, and create delays and
inefficiencies in the Company's supply chain. Should major public health issues, including pandemics, arise, the Company could be adversely affected by more
stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays
in production ramps of new products and disruptions in the operations of the Company's manufacturing vendors and component suppliers. The majority of the
Company's R&D activities, its corporate headquarters, information technology systems and other critical business operations, including certain component
suppliers and manufacturing vendors, are in locations that could be affected by natural disasters. In the event of a natural disaster, the Company could incur
significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.
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The Company expects its quarterly revenue and operating results to fluctuate.
The Company's profit margins vary across its products and distribution channels. The Company's software, accessories, and service and support contracts
generally have higher gross margins than certain of the Company's other products. Gross margins on the Company's hardware products vary across product
lines and can change over time as a result of product transitions, pricing and configuration changes, and component, warranty, and other cost fluctuations. The
Company's direct sales generally have higher associated gross margins than its indirect sales through its channel partners. In addition, the Company's gross
margin and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic or
channel mix, component cost increases, the strengthening U.S. dollar, price competition, or the introduction of new products, including those that have higher
cost structures with flat or reduced pricing.
The Company has typically experienced higher net sales in its first quarter compared to other quarters due in part to seasonal holiday demand. Additionally, new
product introductions can significantly impact net sales, product costs and operating expenses. Further, the Company generates a majority of its net sales from a
single product and a decline in demand for that product could significantly impact quarterly net sales. The Company could also be subject to unexpected
developments late in a quarter, such as lower-than-anticipated demand for the Company's products, issues with new product introductions, an internal systems
failure, or failure of one of the Company's logistics, components supply, or manufacturing partners.
The Company's stock price is subject to volatility.
Investment in new business strategies and acquisitions could disrupt the Company's ongoing business and present risks not originally
contemplated.
Apple Inc. | 2015 Form 10-K | 15
Although management considers the likelihood of such an outcome to be remote, if one or more legal matters were resolved against the Company in a reporting
period for amounts in excess of management's expectations, the Company's consolidated financial statements for that reporting period could be materially
adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or
profits, remedial corporate measures or injunctive relief against the Company that could materially adversely affect its financial condition and operating results.
The Company's retail stores have required substantial investment in equipment and leasehold improvements, information systems, inventory and personnel. The
Company also has entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile
venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities. Because of their unique design elements, locations and
size, these stores require substantially more investment than the Company's more typical retail stores. Due to the high cost structure associated with the
Company's retail stores, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs,
write-offs of equipment and leasehold improvements and severance costs.
The Company's future performance depends in part on support from third-party software developers.
The Company believes decisions by customers to purchase its hardware products depend in part on the availability of third-party software applications and
services. There is no assurance that third-party developers will continue to develop and maintain software applications and services for the Company's products.
If third-party software applications and services cease to be developed and maintained for the Company's products, customers may choose not to buy the
Company's products.
With respect to its Mac products, the Company believes the availability of third-party software applications and services depends in part on the developers'
perception and analysis of the relative benefits of developing, maintaining and upgrading such software for the Company's products compared to Windows-
based products. This analysis may be based on factors such as the market position of the Company and its products, the anticipated revenue that may be
generated, expected future growth of Mac sales and the costs of developing such applications and services. If the Company's minority share of the global
personal computer market causes developers to question the Mac's prospects, developers could be less inclined to develop or upgrade software for the
Company's Mac products and more inclined to devote their resources to developing and upgrading software for the larger Windows market.
With respect to iOS devices, the Company relies on the continued availability and development of compelling and innovative software applications, which are
distributed through a single distribution channel, the App Store. iOS devices are subject to rapid technological change, and, if third-party developers are unable
to or choose not to keep up with this pace of change, third-party applications might not successfully operate and may result in dissatisfied customers. As with
applications for the Company's Mac products, the availability and development of these applications also depend on developers' perceptions and analysis of the
relative benefits of developing, maintaining or upgrading software for the Company's iOS devices rather than its competitors' platforms, such as Android. If
developers focus their efforts on these competing platforms, the availability and quality of applications for the Company's iOS devices may suffer.
The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable terms or
at all.
Many of the Company's products include third-party intellectual property, which requires licenses from those third parties. Based on past experience and industry
practice, the Company believes such licenses generally can be obtained on reasonable terms. There is, however, no assurance that the necessary licenses can
be obtained on acceptable terms or at all. Failure to obtain the right to use third-party intellectual property, or to use such intellectual property on commercially
reasonable terms, could preclude the Company from selling certain products or otherwise have a material adverse impact on the Company's financial condition
and operating results.
The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights.
The Company is subject to various legal proceedings and claims that have not yet been fully resolved and that have arisen in the ordinary course of business,
and additional claims may arise in the future.
For example, technology companies, including many of the Company's competitors, frequently enter into litigation based on allegations of patent infringement or
other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. As the
Company has grown, the intellectual property rights claims against it have increased and may continue to increase. In particular, the Company's cellular enabled
products compete with products from mobile communication and media device companies that hold significant patent portfolios, and the number of patent claims
against the Company has significantly increased. The Company is vigorously defending infringement actions in courts in a number of U.S. jurisdictions and
before the U.S. International Trade Commission, as well as internationally in various countries. The plaintiffs in these actions frequently seek injunctions and
substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company
may have to engage in protracted litigation. If the Company is found to infringe one or more patents or other intellectual property rights, regardless of whether it
can develop non-infringing technology, it may be required to pay substantial damages or royalties to a third-party, or it may be subject to a temporary or
permanent injunction prohibiting the Company from marketing or selling certain products.
In certain cases, the Company may consider the desirability of entering into licensing agreements, although no assurance can be given that such licenses can
be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company's operating expenses.
Apple Inc. | 2015 Form 10-K | 12
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Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to the Company's operations and distracting to
management. In recognition of these considerations, the Company may enter into arrangements to settle litigation.
In management's opinion, there is not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded
accrual, with respect to loss contingencies, including matters related to infringement of intellectual property rights. However, the outcome of litigation is inherently
uncertain.
The Company's primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses
worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company's foreign currency-denominated
sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company's products. Margins on sales
of the Company's products in foreign countries and on sales of products that include components obtained from foreign suppliers, could be materially adversely
affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local
prices to fully offset the dollar's strengthening, or at all, which would adversely affect the U.S. dollar value of the Company's foreign currency-denominated sales
and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Company's foreign currency-
denominated sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments,
thereby limiting the benefit. Additionally, strengthening of foreign currencies may also increase the Company's cost of product components denominated in those
currencies, thus adversely affecting gross margins.
The Company is subject to laws and regulations worldwide, changes to which could increase the Company's costs and individually or in the
aggregate adversely affect the Company's business.
The Company is subject to laws and regulations affecting its domestic and international operations in a number of areas. These U.S. and foreign laws and
regulations affect the Company's activities including, but not limited to, in areas of labor, advertising, digital content, consumer protection, real estate, billing, e-
commerce, promotions, quality of services, telecommunications, mobile communications and media, television, intellectual property ownership and infringement,
tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition,
environmental, health and safety.
By way of example, laws and regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are
extensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture, distribution and use of devices,
locking devices to a carrier's network, or mandating the use of devices on more than one carrier's network. These devices are also subject to certification and
regulation by governmental and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes are
extensive and time consuming, and could result in additional testing requirements, product modifications, or delays in product shipment dates, or could preclude
the Company from selling certain products.
Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction,
further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations
or in their interpretation, could individually or in the aggregate make the Company's products and services less attractive to the Company's customers, delay the
introduction of new products in one or more regions, or cause the Company to change or limit its business practices. The Company has implemented policies
and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company's employees,
contractors, or agents will not violate such laws and regulations or the Company's policies and procedures.
The Company's business is subject to the risks of international operations.
The Company derives a significant portion of its revenue and earnings from its international operations. Compliance with applicable U.S. and foreign laws and
regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy
requirements, environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although the
Company has implemented policies and procedures to comply with these laws and regulations, a violation by the Company's employees, contractors, or agents
could nevertheless occur. Violations of these laws and regulations could materially adversely affect the Company's brand, international growth efforts and
business.
The Company also could be significantly affected by other risks associated with international activities including, but not limited to, economic and labor
conditions, increased duties, taxes and other costs and political instability. Margins on sales of the Company's products in foreign countries, and on sales of
products that include components obtained from foreign suppliers, could be materially adversely affected by international trade regulations, including duties,
tariffs and antidumping penalties. The Company is also exposed to credit and collectability risk on its trade receivables with customers in certain international
markets. There can be no assurance the Company can effectively limit its credit risk and avoid losses.
Apple Inc. | 2015 Form 10-K | 13
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The Company's retail stores have required and will continue to require a substantial investment and commitment of resources and are subject to
numerous risks and uncertainties.
Many factors unique to retail operations, some of which are beyond the Company's control, pose risks and uncertainties. These risks and uncertainties include,
but are not limited to, macro-economic factors that could have an adverse effect on general retail activity, as well as the Company's inability to manage costs
associated with store construction and operation, the Company's failure to manage relationships with its existing retail partners, more challenging environments
in managing retail operations outside the U.S., costs associated with unanticipated fluctuations in the value of retail inventory, and the Company's inability to
obtain and renew leases in quality retail locations at a reasonable cost.
The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency
exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in
foreign exchange rates over the limited time the hedges are in place.
Unresolved Staff Comments
Given the global nature of its business, the Company has both domestic and international investments. Credit ratings and pricing of the Company's investments
can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk or other factors. As a result, the value and
liquidity of the Company's cash, cash equivalents and marketable securities may fluctuate substantially. Therefore, although the Company has not realized any
significant losses on its cash, cash equivalents and marketable securities, future fluctuations in their value could result in a significant realized loss.
The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and has made prepayments to
certain of its suppliers associated with long-term supply agreements. While these arrangements help ensure the supply of components and finished goods, if
these outsourcing partners or suppliers experience severe financial problems or other disruptions in their business, such continued supply could be reduced or
terminated and the net realizable value of these assets could be negatively impacted.
The Company relies on sole-sourced outsourcing partners in the U.S., Asia and Europe to supply and manufacture many critical components, and on
outsourcing partners primarily located in Asia, for final assembly of substantially all of the Company's hardware products. Any failure of these partners to perform
Imay have a negative impact on the Company's cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or
transit to final destinations may be disrupted for a variety of reasons including, but not limited to, natural and man-made disasters, information technology system
failures, commercial disputes, military actions or economic, business, labor, environmental, public health, or political issues.
Substantially all of the Company's manufacturing is performed in whole or in part by a few outsourcing partners located primarily in Asia. The Company has also
outsourced much of its transportation and logistics management. While these arrangements may lower operating costs, they also reduce the Company's direct
control over production and distribution. It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or the
Company's flexibility to respond to changing conditions. Although arrangements with these partners may contain provisions for warranty expense
reimbursement, the Company may remain responsible to the consumer for warranty service in the event of product defects and could experience an
unanticipated product defect or warranty liability. While the Company relies on its partners to adhere to its supplier code of conduct, material violations of the
supplier code of conduct could occur.
The Company depends on component and product manufacturing and logistical services provided by outsourcing partners, many of which are
located outside of the U.S.
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Apple Inc. | 2015 Form 10-K | 10
The Company and other participants in the markets for mobile communication and media devices and personal computers also compete for various components
with other industries that have experienced increased demand for their products. The Company uses some custom components that are not common to the rest
of these industries. The Company's new products often utilize custom components available from only one source. When a component or product uses new
technologies, initial capacity constraints may exist until the suppliers' yields have matured or manufacturing capacity has increased. Continued availability of
these components at acceptable prices, or at all, may be affected for any number of reasons, including if those suppliers decide to concentrate on the production
of common components instead of components customized to meet the Company's requirements. The supply of components for a new or existing product could
be delayed or constrained, or a key manufacturing vendor could delay shipments of completed products to the Company.
Because the Company currently obtains components from single or limited sources, the Company is subject to significant supply and pricing risks. Many
components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing
fluctuations. While the Company has entered into agreements for the supply of many components, there can be no assurance that the Company will be able to
extend or renew these agreements on similar terms, or at all. A number of suppliers of components may suffer from poor financial conditions, which can lead to
business failure for the supplier or consolidation within a particular industry, further limiting the Company's ability to obtain sufficient quantities of components.
The effects of global or regional economic conditions on the Company's suppliers, described in " Global and regional economic conditions could materially
adversely affect the Company" above, also could affect the Company's ability to obtain components. Therefore, the Company remains subject to significant risks
of supply shortages and price increases.
Future operating results depend upon the Company's ability to obtain components in sufficient quantities.
The Company must order components for its products and build inventory in advance of product announcements and shipments. Consistent with industry
practice, components are normally acquired through a combination of purchase orders, supplier contracts and open orders, in each case based on projected
demand. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. Purchase
commitments typically cover forecasted component and manufacturing requirements for periods up to 150 days. Because the Company's markets are volatile,
competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient
amounts of components or products, or not fully utilize firm purchase commitments.
The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated demand or net realizable value
and accrues necessary cancellation fee reserves for orders of excess products and components. The Company also reviews its long-lived assets, including
capital assets held at its suppliers' facilities and inventory prepayments, for impairment whenever events or circumstances indicate the carrying amount of an
asset may not be recoverable. If the Company determines that impairment has occurred, it records a write-down equal to the amount by which the carrying value
of the assets exceeds its fair value. Although the Company believes its provisions related to inventory, capital assets, inventory prepayments and other assets
and purchase commitments are currently adequate, no assurance can be given that the Company will not incur additional related charges given the rapid and
unpredictable pace of product obsolescence in the industries in which the Company competes.
The Company's products and services may experience quality problems from time to time that can result in decreased sales and operating margin
and harm to the Company's reputation.
The Company faces substantial inventory and other asset risk in addition to purchase commitment cancellation risk.
Table of Contents
Apple Inc. | 2015 Form 10-K | 9
Carriers providing cellular network service for iPhone typically subsidize users' purchases of the device. There is no assurance that such subsidies will be
continued at all or in the same amounts upon renewal of the Company's agreements with these carriers or in agreements the Company enters into with new
carriers.
The Company distributes its products through cellular network carriers, wholesalers, national and regional retailers and value-added resellers, many of whom
distribute products from competing manufacturers. The Company also sells its products and third-party products in most of its major markets directly to
education, enterprise and government customers and consumers and small and mid-sized businesses through its online and retail stores.
The Company depends on the performance of distributors, carriers and other resellers.
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.
Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce new products,
services and technologies, enhance existing products and services, effectively stimulate customer demand for new and upgraded products and successfully
manage the transition to these new and upgraded products. The success of new product introductions depends on a number of factors including, but not limited
to, timely and successful product development, market acceptance, the Company's ability to manage the risks associated with new product production ramp-up
issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated
product demand, the availability of products in appropriate quantities and at expected costs to meet anticipated demand and the risk that new products may have
quality or other defects or deficiencies in the early stages of introduction. Accordingly, the Company cannot determine in advance the ultimate effect of new
product introductions and transitions.
There can be no assurance the Company will be able to continue to provide products and services that compete effectively.
The Company is the only authorized maker of hardware using OS X, which has a minority market share in the personal computer market. This market has been
contracting and is dominated by computer makers using competing operating systems, most notably Windows. In the market for personal computers and
accessories, the Company faces a significant number of competitors, many of which have broader product lines, lower priced products and a larger installed
customer base. Historically, consolidation in this market has resulted in larger competitors. Price competition has been particularly intense as competitors selling
Windows-based personal computers have aggressively cut prices and lowered product margins. An increasing number of internet-enabled devices that include
software applications and are smaller and simpler than traditional personal computers compete for market share with the Company's existing products. The
Company's financial condition and operating results also depend on its ability to continually improve the Mac platform to maintain its functional and design
advantages.
The Company markets certain mobile communication and media devices based on the iOS mobile operating system and also markets related third-party digital
content and applications. The Company faces substantial competition in these markets from companies that have significant technical, marketing, distribution
and other resources, as well as established hardware, software and digital content supplier relationships; and the Company has a minority market share in the
global smartphone market. Additionally, the Company faces significant price competition as competitors reduce their selling prices and attempt to imitate the
Company's product features and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive
than those they currently offer. The Company competes with business models that include content provided to users for free. The Company also competes with
illegitimate ways to obtain third-party digital content and applications. Some of the Company's competitors have greater experience, product breadth and
distribution channels than the Company. Because some current and potential competitors have substantial resources and/or experience and a lower cost
structure, they may be able to provide products and services at little or no profit or even at a loss. The Company also expects competition to intensify as
competitors attempt to imitate the Company's approach to providing components seamlessly within their individual offerings or work collaboratively to offer
integrated solutions. The Company's financial condition and operating results depend substantially on the Company's ability to continually improve iOS and iOS
devices in order to maintain their functional and design advantages.
Table of Contents
Table of Contents
Many resellers have narrow operating margins and have been adversely affected in the past by weak economic conditions. Some resellers have perceived the
expansion of the Company's direct sales as conflicting with their business interests as distributors and resellers of the Company's products. Such a perception
could discourage resellers from investing resources in the distribution and sale of the Company's products or lead them to limit or cease distribution of those
products. The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected resellers' stores with Company
employees and contractors, and improving product placement displays. These programs could require a substantial investment while providing no assurance of
return or incremental revenue. The financial condition of these resellers could weaken, these resellers could stop distributing the Company's products, or
uncertainty regarding demand for some or all of the Company's products could cause resellers to reduce their ordering and marketing of the Company's
products.
The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.
The Company sells complex hardware and software products and services that can contain design and manufacturing defects. Sophisticated operating system
software and applications, such as those sold by the Company, often contain "bugs" that can unexpectedly interfere with the software's intended operation. The
Company's online services may from time to time experience outages, service slowdowns, or errors. Defects may also occur in components and products the
Company purchases from third parties. There can be no assurance the Company will be able to detect and fix all defects in the hardware, software and services
it sells. Failure to do so could result in lost revenue, significant warranty and other expenses and harm to the Company's reputation.
Apple Inc. | 2015 Form 10-K | 18
Apple Inc. | 2015 Form 10-K | 16
Table of Contents
The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments related to long-term supply
agreements, and this risk is heightened during periods when economic conditions worsen.
The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and value-added resellers. The Company also sells its
products directly to small and mid-sized businesses and education, enterprise and government customers. A substantial majority of the Company's outstanding
trade receivables are not covered by collateral, third-party financing arrangements or credit insurance. The Company's exposure to credit and collectability risk
on its trade receivables is higher in certain international markets and its ability to mitigate such risks may be limited. The Company also has unsecured vendor
non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or assemble final
products for the Company. In addition, the Company has made prepayments associated with long-term supply agreements to secure supply of inventory
components. As of September 26, 2015, a significant portion of the Company's trade receivables was concentrated within cellular network carriers, and its
vendor non-trade receivables and prepayments related to long-term supply agreements were concentrated among a few individual vendors located primarily in
Asia. While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables, as well as long-term
prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.
The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax
liabilities.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company's subsidiaries are organized.
Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company's effective tax rates could be
affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes
in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of
Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Company's Irish subsidiaries comply
with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past
taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material.
The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and
governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its
provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company's effective tax rates were to increase, particularly in the
U.S. or Ireland, or if the ultimate determination of the Company's taxes owed is for an amount in excess of amounts previously accrued, the Company's financial
condition, operating results and cash flows could be adversely affected.
Apple Inc. | 2015 Form 10-K | 17
Table of Contents
Item 1B.
None.
The Company relies on access to third-party digital content, which may not be available to the Company on commercially reasonable terms or at all.
The Company contracts with numerous third parties to offer their digital content. This includes the right to sell currently available music, movies, TV shows and
books. The licensing or other distribution arrangements with these third parties are for relatively short terms and do not guarantee the continuation or renewal of
these arrangements on reasonable terms, if at all. Some third-party content providers and distributors currently or in the future may offer competing products and
services, and could take action to make it more difficult or impossible for the Company to license or otherwise distribute their content in the future. Other content
owners, providers or distributors may seek to limit the Company's access to, or increase the cost of, such content. The Company may be unable to continue to
offer a wide variety of content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach. Failure to obtain the right to make
available third-party digital content, or to make available such content on commercially reasonable terms, could have a material adverse impact on the
Company's financial condition and operating results.
Item 2.
The Company's headquarters are located in Cupertino, California. As of September 26, 2015, the Company owned or leased 25.6 million square feet of building
space, primarily in the U.S. The Company also owned or leased building space in various locations, including throughout Europe, China, Singapore and Japan.
Of the total owned or leased building space 18.5 million square feet was leased building space, which includes approximately 5.3 million square feet related to
retail store space. Additionally, the Company owns a total of 1,757 acres of land in various locations.
As of September 26, 2015, the Company owned a manufacturing facility in Cork, Ireland that also housed a customer support call center; facilities in Elk Grove,
California that included warehousing and distribution operations and a customer support call center; and a facility in Mesa, Arizona. The Company also owned
land in Austin, Texas where it is expanding its existing office space and customer support call center. In addition, the Company owned facilities and land for R&D
and corporate functions in San Jose, California and Cupertino, California, including land that is being developed for the Company's second corporate campus.
The Company also owned data centers in Newark, California; Maiden, North Carolina; Prineville, Oregon; and Reno, Nevada. Outside the U.S., the Company
owned additional facilities for various purposes.
The Company believes its existing facilities and equipment, which are used by all operating segments, are in good operating condition and are suitable for the
conduct of its business. The Company has invested in internal capacity and strategic relationships with outside manufacturing vendors and continues to make
investments in capital equipment as needed to meet anticipated demand for its products.
Item 3.
Legal Proceedings
The Company is subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not been fully
resolved and that have arisen in the ordinary course of business. 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 legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management
considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for
amounts in excess of management's expectations, the Company's consolidated financial statements for that reporting period could be materially adversely
affected. See the risk factor" The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual
property rights" in Part I, Item 1A of this Form 10-K under the heading "Risk Factors." The Company settled certain matters during the fourth quarter of 2015 that
did not individually or in the aggregate have a material impact on the Company's financial condition or operating results.
Apple eBooks Antitrust Litigation (United States of America v. Apple Inc., et al.)
On April 11, 2012, the U.S. Department of Justice filed a civil antitrust action against the Company and five major book publishers in the U.S. District Court for
the Southern District of New York, alleging an unreasonable restraint of interstate trade and commerce in violation of §1 of the Sherman Act and seeking, among
other things, injunctive relief, the District Court's declaration that the Company's agency agreements with the publishers are null and void and/or the District
Court's reformation of such agreements. On July 10, 2013, the District Court found, following a bench trial, that the Company conspired to restrain trade in
violation of §1 of the Sherman Act and relevant state statutes to the extent those laws are congruent with §1 of the Sherman Act. The District Court entered a
permanent injunction, which took effect on October 6, 2013 and will be in effect for five years unless the judgment is overturned on appeal. The Company has
taken the necessary steps to comply with the terms of the District Court's order, including renegotiating agreements with the five major eBook publishers,
updating its antitrust training program and completing a two-year monitorship with a court-appointed antitrust compliance monitor, whose appointment the District
Court ended in October 2015. The Company appealed the District Court's decision. Pursuant to a settlement agreement reached in June 2014, any damages the
Company may be obligated to pay will be determined by the outcome of the final adjudication following exhaustion of all appeals.
Item 4.
Mine Safety Disclosures
Not applicable.
Properties
Some third-party digital content providers require the Company to provide digital rights management and other security solutions. If requirements change, the
Company may have to develop or license new technology to provide these solutions. There is no assurance the Company will be able to develop or license such
solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation that would force the
Company to license its digital rights management, which could lessen the protection of content and subject it to piracy and also could negatively affect
arrangements with the Company's content providers.
Apple Inc. | 2015 Form 10-K | 11
6,085,572
6,122,663
16,051
13%
18,063
10%
19,909
21,483
12%
24,079
6%
25,471
31,980
(5)%
30,283
(23)%
23,227
10.067
20%
8,379
(17)%
150,257
71,033
(4)%
67,977
(19)%
13%
169,219
37%
91,279
231,218
54,856
iPhone
$ 170,910
7%
$ 182,795
28%
$ 233,715
10,117
iPad
Mac
$
$ 101,991
84%
58,715
40,980
8%
44,285
14%
50,337
4% $ 77,093
80,095
17% $
93,864
$
2013
Change
2014
31,853
18%
27,016
15,706
52%
$ 155,041
$ 170,910
7%
$ 182,795
28%
$ 233,715
12%
12,039
11,248
34%
15,093
13,782
11%
15,314
3%
(7)%
20,587
9%
18,906
Mac
Net sales and unit sales for iPad declined in 2014 compared to 2013. iPad net sales and unit sales grew in the Greater China and Japan segments but this
growth was more than offset by a decline in all other segments. Overall iPad ASPS were relatively flat in 2014 compared to 2013 with a shift in mix to higher-
priced iPads being offset by the October 2013 price reduction of iPad mini™M. ASPs increased in the Japan and Rest of Asia Pacific segments but were slightly
down in other segments.
Net sales and unit sales for iPad declined during 2015 compared to 2014. The Company believes the decline in iPad sales is due in part to a longer repurchase
cycle for iPads and some level of cannibalization from the Company's other products. iPad ASPs declined by 5% during 2015 compared to 2014, primarily as a
result of the effect of weakness in most foreign currencies relative to the U.S. dollar and a shift in mix to lower-priced iPads.
71,033
(4)%
19%
17%
67,977
(5)% $ 31,980
30,283
2013
Change
2014
Change
(23)% $
(19)%
23,227
10%
54,856
$
The following table presents Mac net sales and unit sales information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
Net sales
Percentage of total net sales
Unit sales
The year-over-year growth in Mac net sales and unit sales for 2014 was primarily driven by increased sales of MacBook Air, MacBook Pro and Mac Pro. Mac net
sales and unit sales increased in all of the Company's operating segments. Mac ASPs decreased during 2014 compared to 2013 primarily due to price
reductions on certain Mac models and a shift in mix towards Mac portable systems.
The year-over-year growth in Mac net sales and unit sales during 2015 was driven by strong demand for Mac portables. Mac ASPs declined 3% during 2015
compared to 2014 largely due to the effect of weakness in most foreign currencies relative to the U.S. dollar.
16,341
16%
13%
13%
18,906
9%
Unit sales
11%
20,587
Change
2014
24,079
$
6%
Change
2015
25,471
$
2013
12% $ 21,483
Percentage of total net sales
Net sales
2015
Change
2014
Change
2015
The following table presents iPhone net sales and unit sales information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
iPhone
Product Performance
2013
Table of Contents
(3)
Includes revenue from the iTunes Store Ⓡ, App Store, Mac App Store, iBooks Store TM and Apple MusicTM (collectively "Internet Services"), AppleCare,
Apple Pay Ⓡ, licensing and other services.
(2)
Includes deferrals and amortization of related software upgrade rights and non-software services.
(1)
16,341
16%
Includes sales of Apple TV ®, Apple Watch, Beats products, iPod and Apple-branded and third-party accessories.
Apple Inc. | 2015 Form 10-K | 24
Change
Net sales
Rest of Asia Pacific
The following table presents iPad net sales and unit sales information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
iPad
The year-over-year growth in iPhone net sales and unit sales in 2014 resulted primarily from the successful introduction of new iPhones in the latter half of
calendar year 2013, the successful launch of iPhone 6 and 6 Plus beginning in September 2014, and expanded distribution. iPhone unit sales grew in all of the
Company's operating segments, while iPhone net sales grew in all segments except Rest of Asia Pacific. Overall ASPs for iPhone were relatively flat in 2014
compared to 2013, with growth in ASPS in the Americas segment being offset by a decline in ASPS in the Greater China, Japan and Rest of Asia Pacific
segments.
The year-over-year growth in iPhone net sales and unit sales during 2015 primarily resulted from strong demand for iPhone 6 and 6 Plus during 2015. Overall
average selling prices ("ASPS") for iPhone increased by 11% during 2015 compared to 2014, due primarily to the introduction of iPhone 6 and 6 Plus in
September 2014, partially offset by the effect of weakness in most foreign currencies relative to the U.S. dollar.
150,257
13%
169,219
Percentage of total net sales
Unit sales
37%
56%
66%
231,218
91,279
$
12%
52% $ 101,991
$ 155,041
53%
Apple Inc. | 2015 Form 10-K | 25
2015
Total net sales
10%
9%
The year-over-year growth in R&D expense in 2015 and 2014 was driven primarily by an increase in headcount and related expenses, including share-based
compensation costs, 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 are directly related to timely development of new and updated products that are central to the
Company's core business strategy.
Selling, General and Administrative
The year-over-year growth in selling, general and administrative expense in 2015 and 2014 was primarily due to increased headcount and related expenses,
including share-based compensation costs, and higher spending on marketing and advertising.
Apple Inc. | 2015 Form 10-K | 28
14%
$
22%
44,285
24%
8% $
2013
40,980
24%
The year-over-year increase in Europe net sales during 2015 was driven primarily by growth in net sales and unit sales of iPhone, partially offset by the effect of
weakness in foreign currencies relative to the U.S. dollar and a decline in net sales and unit sales of iPad.
The growth in the Europe segment in 2014 was due to increased net sales of iPhone, Mac and Services, as well as strength in European currencies relative to
the U.S. dollar, partially offset by a decline in net sales of iPad. iPhone growth resulted primarily from the successful introduction of iPhone 5s and 5c in the
second half of calendar 2013 and the successful launch of iPhone 6 and 6 Plus in over 20 countries in Europe in September 2014. Mac growth was driven
primarily by increased net sales and unit sales of MacBook Air, MacBook Pro and Mac Pro.
10%
15,305
$
18%
Change
35% $
2013
4,475
$
3%
14,329
6%
19%
$
Apple Inc. | 2015 Form 10-K | 26
3%
11,993
7%
11%
10,830
6%
$
22,396
24%
$
18,034
3%
6,041
Table of Contents
The following table presents Greater China net sales information for 2015, 2014 and 2013 (dollars in millions):
2015
Change
2014
Net sales
Percentage of total net sales
$
15,706
3% $
15,314
Change
11% $
2013
13,782
7%
8%
8%
The following table presents Japan net sales information for 2015, 2014 and 2013 (dollars in millions):
Japan
The Greater China segment experienced year-over-year growth in net sales in 2014 that was significantly higher than the growth rate for the Company overall.
Greater China growth was driven by higher unit sales and net sales of all major product categories, in addition to higher net sales of Services. Growth in net
sales and unit sales of iPhone was especially strong, driven by the successful launch of iPhone 5s and 5c in Mainland China and Hong Kong in September
2013, the successful launch of iPhone 6 and 6 Plus in Hong Kong in September 2014, increased demand for the Company's entry-priced iPhones and the
addition of a significant new carrier in the second quarter of 2014.
Greater China experienced strong year-over-year increases in net sales during 2015 driven primarily by iPhone sales.
Net sales
Percentage of total net sales
2015
Change
2014
Change
2013
Greater China
$
84%
$
31,853
17%
18%
$
27,016
16%
58,715
25%
$
34%
8,067
Fiscal 2014 Highlights
In April 2015, the Company announced a significant increase to its capital return program by raising the expected total size of the program to $200 billion through
March 2017. This included increasing its share repurchase authorization to $140 billion and raising its quarterly dividend to $0.52 per share beginning in May
2015. During 2015, the Company spent $36.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $11.6 billion.
Additionally, the Company issued $14.5 billion of U.S. dollar-denominated, € 4.8 billion of euro-denominated, SFr1.3 billion of Swiss franc-denominated, £1.3
billion of British pound-denominated, A$2.3 billion of Australian dollar-denominated and ¥250.0 billion of Japanese yen-denominated term debt during 2015.
Net sales rose 28% or $50.9 billion during 2015 compared to 2014, driven by a 52% year-over-year increase in iPhone ® net sales. iPhone net sales and unit
sales in 2015 increased in all of the Company's reportable operating segments. The Company also experienced year-over-year net sales increases in Mac ®,
Services and Other Products. Apple Watch Ⓡ, which launched during the third quarter of 2015, accounted for more than 100% of the year-over-year growth in
net sales of Other Products. Net sales growth during 2015 was partially offset by the effect of weakness in most foreign currencies relative to the U.S. dollar and
lower iPad® net sales. Total net sales increased in each of the Company's reportable operating segments, with particularly strong growth in Greater China
where year-over-year net sales increased 84%.
Fiscal 2015 Highlights
The Company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a
variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company sells its products worldwide
through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added
resellers. In addition, the Company sells a variety of third-party 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.
Overview and Highlights
This section and other parts of this Annual Report on Form 10-K ("Form 10-K") contain forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain
assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words
such as "future,” “anticipates,” “believes," "estimates," "expects," "intends,” “plans,” “predicts," "will," "would,” “could,” “can,” “may,” and similar terms. Forward-
looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under
the heading "Risk Factors," which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial
statements and notes thereto included in Part II, Item 8 of this Form 10-K. All information presented herein is based on the Company's fiscal calendar. Unless
otherwise stated, references to particular years, quarters, months or periods refer to the Company's fiscal years ended in September and the associated
quarters, months and periods of those fiscal years. Each of the terms the "Company" and "Apple" as used herein refers collectively to Apple Inc. and its wholly-
owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as
required by law.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7.
Table of Contents
Apple Inc. | 2015 Form 10-K | 22
Includes current and long-term portion of term debt.
(2)
(1) Other long-term obligations exclude non-current deferred revenue.
76,615
Net sales rose 7% or $11.9 billion during 2014 compared to 2013. This was driven by increases in net sales of iPhone, Mac and Services. Net sales and unit
sales increased for iPhone primarily due to the successful introduction of iPhone 5s and 5c in the latter half of calendar year 2013, the successful launch of
iPhone 6 and 6 Plus beginning in the fourth quarter of 2014, and expanded distribution. Mac net sales and unit sales increased primarily due to strong demand
for MacBook Air Ⓡ and MacBook Pro Ⓡ which were updated in 2014 with faster processors and offered at lower prices. Net sales of Services grew primarily due
to increased revenue from sales through the App Store ®, AppleCare ® and licensing. Growth in these areas was partially offset by the year-over-year decline in
net sales for iPad due to lower unit sales in many markets, and a decline in net sales of Other Products. All of the Company's operating segments other than the
Rest of Asia Pacific segment experienced increased net sales in 2014, with growth being strongest in the Greater China and Japan operating segments.
During 2014, the Company completed various business acquisitions, including the acquisitions of Beats Music, LLC, which offers a subscription streaming music
service, and Beats Electronics, LLC, which makes Beats ® headphones, speakers and audio software.
Apple Inc. | 2015 Form 10-K | 23
Table of Contents
Other Products (1)(3)
Services (2)
Mac (1)
iPad (1)
iPhone (1)
Net Sales by Product:
Total net sales
$
Rest of Asia Pacific
Greater China
Europe
Americas
Net Sales by Operating Segment:
The following table shows net sales by operating segment and net sales and unit sales by product during 2015, 2014 and 2013 (dollars in millions and units in
thousands):
Sales Data
In April 2014, the Company increased its share repurchase authorization to $90 billion and the quarterly dividend was raised to $0.47 per common share,
resulting in an overall increase in its capital return program from $100 billion to over $130 billion. During 2014, the Company utilized $45 billion to repurchase its
common stock and paid dividends and dividend equivalents of $11.1 billion. The Company also issued $12.0 billion of long-term debt during 2014, with varying
maturities through 2044, and launched a commercial paper program, with $6.3 billion outstanding as of September 27, 2014.
Japan
39,756
$
10,100
The year-over-year increase in the gross margin percentage in 2015 was driven primarily by a favorable shift in mix to products with higher margins and, to a
lesser extent, by improved leverage on fixed costs from higher net sales. These positive factors were partially offset primarily by higher product cost structures
and, to a lesser extent, by the effect of weakness in most foreign currencies relative to the U.S. dollar.
The year-over-year increase in the gross margin percentage in 2014 was driven by multiple factors including lower commodity costs, a favorable shift in mix to
products with higher margins and improved leverage on fixed costs from higher net sales, which was partially offset by the weakness in several foreign
currencies relative to the U.S. dollar, price reductions on select products and higher cost structures on certain new products.
The Company anticipates gross margin during the first quarter of 2016 to be between 39% and 40%. The foregoing statement regarding the Company's
expected gross margin percentage in the first 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 I, Item 1A of this Form 10-K under the heading "Risk Factors" and those
described in this paragraph. In general, the Company believes gross margins will remain under downward pressure due to a variety of factors, including
continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product transitions, potential increases in the
cost of components, and potential strengthening of the U.S. dollar, as well as potential increases in the costs of outside manufacturing services and a potential
shift in the Company's sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take
product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Company's ability to manage product quality
and warranty costs effectively and to stimulate demand for certain of its products. Due to the Company's significant international operations, its financial
condition and operating results, including gross margins, could be significantly affected by fluctuations in exchange rates.
Operating Expenses
Operating expenses for 2015, 2014 and 2013 are as follows (dollars in millions):
Research and development
Percentage of total net sales
37.6%
Selling, general and administrative
Total operating expenses
Percentage of total net sales
Research and Development
2015
Change
2014
$
Percentage of total net sales
Unit Sales by Product:
38.6%
$
$
0
$
0
$
Apple Inc. | 2015 Form 10-K | 27
Table of Contents
康康
Gross Margin
Net sales
Cost of sales
Gross margin
Gross margin percentage
2015
2014
2013
$ 233,715 $ 182,795 $ 170,910
140,089 112,258
106,606
93,626 $ 70,537 $ 64,304
40.1%
Gross margin for 2015, 2014 and 2013 is as follows (dollars in millions):
$ 205,666
Table of Contents
The following table presents net sales information of Services for 2015, 2014 and 2013 (dollars in millions):
$
254
$
170
$
229
$
138
$
100
$
Apple Inc.
2015
2014
2013
294
S&P 500 Index
$
100
$
104
$
100
$
S&P Information Technology Index
187
2012
$
$
157
$
132
$
101
$
188
137
2011
September
$50
$100
$150
$200
$250
$300
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500 Index,
the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index for the five years ended September 26, 2015. The graph
assumes $100 was invested in each of the Company's common stock, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S.
Technology Supersector Index as of the market close on September 24, 2010. Note that historic stock price performance is not necessarily indicative of future
stock price performance.
Company Stock Performance
Table of Contents
Apple Inc. | 2015 Form 10-K | 20
In May 2015, the Company entered into an accelerated share repurchase arrangement ("ASR") to purchase up to $6.0 billion of the Company's
common stock. In July 2015, the purchase period for this ASR ended and an additional 10.0 million shares were delivered and retired. In total,
48.3 million net shares were delivered under this ASR at an average repurchase price of $124.24.
In 2012, the Company's Board of Directors authorized a program to repurchase up to $10 billion of the Company's common stock beginning in 2013.
The Company's Board of Directors increased the authorization to repurchase the Company's common stock to $60 billion in April 2013, to $90 billion in
April 2014 and to $140 billion in April 2015. As of September 26, 2015, $104 billion of the $140 billion had been utilized. The remaining $36 billion in the
table represents the amount available to repurchase shares under the authorized repurchase program as of September 26, 2015. The Company's
share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately
negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
(2)
36,024
$
9/25/10
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Apple Inc., the S&P 500 Index, the S&P Information Technology Index
and the Dow Jones US Technology Supersector Index
September
September
September
September
September
Copyright © 2015 S&P, a division of McGraw Hill Financial. All rights reserved.
Copyright © 2015 Dow Jones & Co. All rights reserved.
$100 invested on 9/25/10 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company's
common stock and September 30th for indexes.
2010
9/26/15
9/27/14
S&P Information Technology
9/28/13
9/29/12
S&P 500
Apple Inc.
9/24/11
----Dow Jones US Technology Supersector
$
147
$
$
1.98
$
$
6.45
$
9.22
$
$
6.49
$
9.28
$
ᏌᏊ ᏌᏊ
$ 25,922
1.82
$
SA SA SA
5.72
5,753,421
5,793,069
0
$
3.95
$
4.01
EA EA EA
$ 108,249
0.38
1.64
6.31
$
5.68
$
6.38
$
$
$ 156,508
$ 41,733
2013
170,910
$ 37,037
$
183
$
183
$
141
$
134
Apple Inc. | 2015 Form 10-K | 21
$
$
100
$
Dow Jones U.S. Technology Supersector Index
194
$
190
103
131,775
Table of Contents
Selected Financial Data
2014
$ 182,795
$ 39,510
2015
$ 233,715
$ 53,394
Commercial paper
Total assets
Total cash, cash equivalents and marketable securities
Diluted
Shares used in computing earnings per share:
Basic
Item 6.
Cash dividends declared per share
Basic
Earnings per share:
Net income
Net sales
2011
2012
The information set forth below for the five years ended September 26, 2015, is not necessarily indicative of results of future operations, and should be read in
conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information
presented below (in millions, except number of shares, which are reflected in thousands, and per share amounts).
Diluted
Services
37,394
$
$ 176,064
$
0
$
0
$ 16,664
$ 57,854
$ 118,210
SSSSSSS
$
81,570
$ 116,371
50,337
$
Change
2014
$ 121,251
SSSSSSS
$ 123,549
$ 111,547
$ 119,355
SASSASA
$ 28,987
$ 24,826
$ 120,292
SASSASASS
6,477,320
6,521,634
Change
$ 146,761
6,469,806
6,556,514
$ 207,000
$
0
$ 16,960
$ 20,208
$ 83,451
6,543,726
6,617,483
$ 171,124
2015
Net sales
The increase in net sales of Services in 2014 compared to 2013 was primarily due to growth in net sales from Internet Services, AppleCare and licensing.
Internet Services generated a total of $10.2 billion in net sales during 2014 compared to $9.3 billion during 2013. Growth in net sales from Internet Services was
driven by increases in revenue from app sales reflecting continued growth in the installed base of iOS devices and the expanded offerings of iOS apps and
related in-app purchases. This was partially offset by a decline in sales of digital music.
The increase in net sales of Services during 2015 compared to 2014 was primarily due to growth from Internet Services and licensing. The App Store, included
within Internet Services, generated strong year-over-year net sales growth of 29%.
9%
16,051
2013
Change
13% $
2014
18,063
10%
9%
10% $
The year-over-year increase in Japan net sales during 2015 was driven primarily by growth in Services largely associated with strong App Store sales, partially
offset by the effect of weakness in the Japanese yen relative to the U.S. dollar.
Change
2015
19,909
$
Percentage of total net sales
Net sales
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, each reportable operating segment provides
similar hardware and software products and similar services, they are 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 II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data."
Americas
The following table presents Americas net sales information for 2015, 2014 and 2013 (dollars in millions):
The following table presents Europe net sales information for 2015, 2014 and 2013 (dollars in millions):
Europe
The growth in the Americas segment in 2014 was due to increased net sales of iPhone, Mac and Services that was partially offset by a decline in net sales of
iPad and Other Products and weakness in foreign currencies relative to the U.S. dollar compared to 2013. iPhone growth resulted primarily from the successful
introduction of iPhone 5s and 5c in September 2013 and the successful launch of iPhone 6 and 6 Plus in September 2014. Mac growth was driven primarily by
increased net sales and unit sales of MacBook Air and Mac Pro.
The year-over-year growth in Americas net sales during 2015 was driven primarily by growth in net sales and unit sales of iPhone, partially offset by a decline in
net sales and unit sales of iPad.
45%
2013
77,093
4% $
Percentage of total net sales
Change
40%
Change
17% $
93,864
$
2015
Percentage of total net sales
Net sales
2014
80,095
44%
33,427
$
Total shareholders' equity
August 30, 2015 to September 26, 2015:
Open market and privately negotiated purchases
Open market and privately negotiated purchases
August 2, 2015 to August 29, 2015:
May 2015 ASR
June 28, 2015 to August 1, 2015:
Periods
Share repurchase activity during the three months ended September 26, 2015 was as follows (in millions, except number of shares, which are reflected in
thousands, and per share amounts):
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Table of Contents
Apple Inc. | 2015 Form 10-K | 19
The Company paid a total of $11.4 billion and $11.0 billion in dividends during 2015 and 2014, respectively, and expects to pay quarterly dividends of $0.52 per
common share each quarter, subject to declaration by the Board of Directors. The Company also plans to increase its dividend on an annual basis, subject to
declaration by the Board of Directors.
Dividends
As of October 9, 2015, there were 25,924 shareholders of record.
Holders
First Quarter
Open market and privately negotiated purchases
Total
(1)
Total Number
37,394
68,526
114.15
$
68,526
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs (1)
9,973 (2)
15,882
Third Quarter
Second Quarter
134.54 $ 123.10 $ 133.60 $ 104.63 $ 119.75 $ 95.18
95.05 - $ 73.05 $ 80.18 $ 70.51 $ 82.16 - $ 67.77
Publicly
Announced
Plans or
Programs
124.66
$
15,882
(2)
9,973 (2)
Average
Price
Paid Per
Share
of Shares
Purchased
Total Number
of Shares
Purchased
as Part of
132.97 - $ 92.00 $
103.74 $ 92.09 $
$
$
$
12,039
6%
7%
The year-over-year increase in Rest of Asia Pacific net sales during 2015 primarily reflects strong growth in net sales and unit sales of iPhone, partially offset by
the effect of weakness in foreign currencies relative to the U.S. dollar and a decline in net sales and unit sales of iPad.
Net sales in the Rest of Asia Pacific segment declined in 2014 compared to 2013 due to year-over-year reductions in net sales in all major product categories
except Mac and reductions in unit sales of iPad. Net sales in 2014 were also negatively affected by the weakness in several foreign currencies relative to the
U.S. dollar, including the Australian dollar.
$ 155,239
2013
$ 290,479
Total term debt (2)
$
8,499
55,963
$ 231,839
$
6,308
Other long-term obligations (1)
Total liabilities
$
112.94
Change
(7)%
34% $
Fourth Quarter
2014 price range per share
2015 price range per share
The price range per share of common stock presented below represents the highest and lowest intraday sales prices for the Company's common stock on the
NASDAQ during each quarter of the two most recent years.
Price Range of Common Stock
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is traded on the NASDAQ Stock Market LLC ("NASDAQ") under the symbol AAPL.
Item 5.
2014
11,248
PART II
The following table presents Rest of Asia Pacific net sales information for 2015, 2014 and 2013 (dollars in millions):
Net sales
Percentage of total net sales
2015
Change
$
15,093
6%
Table of Contents
In 2014 the Japan segment generated year-over-year increases in net sales and unit sales of every major product category and experienced growth in net sales
of Services. The year-over-year growth in iPhone was driven by the successful launch of iPhone 5s and 5c in September 2013, the successful launch of iPhone
6 and 6 Plus in September 2014, increased demand for the Company's entry-priced iPhones and the addition of a significant new carrier in the fourth quarter of
2013. These positive factors were partially offset by weakness in the Japanese Yen relative to the U.S. dollar.
9,500
Other Income/(Expense), Net
$
1,518
1,389
Payments Due in
More Than 5 Years
34,345
2,592
Total
$
55,701
6,271
$
0
1,898
12,916
0
0
29,464
53
9,356
757
$
10,798
$
37,694
$
98,697
Operating Leases
The Company's major facility leases are typically for terms not exceeding 10 years and generally contain multi-year renewal options. As of September 26, 2015,
the Company had a total of 463 retail stores. Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and often
contain multi-year renewal options. As of September 26, 2015, the Company's total future minimum lease payments under noncancelable operating leases were
$6.3 billion, of which $3.6 billion related to leases for retail space.
Purchase Commitments
The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company's products and to perform final assembly and testing of
finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically
covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with
industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected
demand information. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. As of
September 26, 2015, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $29.5
billion.
Other Obligations
The Company's other off-balance sheet obligations were comprised of commitments to acquire capital assets, including product tooling and manufacturing
process equipment, and commitments related to inventory prepayments, advertising, licensing, R&D, internet and telecommunications services, energy and
other obligations.
The Company's other non-current liabilities in the Consolidated Balance Sheets consist primarily of deferred tax liabilities, gross unrecognized tax benefits and
the related gross interest and penalties. As of September 26, 2015, the Company had non-current deferred tax liabilities of $24.1 billion. Additionally, as of
September 26, 2015, the Company had gross unrecognized tax benefits of $6.9 billion and an additional $1.3 billion for gross interest and penalties classified as
non-current liabilities. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with
these tax liabilities; therefore, such amounts are not included in the above contractual obligation table.
Indemnification
7,261
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 did not record a liability for infringement costs related to
indemnification as of September 26, 2015 or September 27, 2014.
$
2,500
772
29,464
4,553
37,289
0
0
56
2,544
Total
$
35,739 $
40,950
$
63,026
$
3,795
$
143,510
$
Apple Inc. | 2015 Form 10-K | 31
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained
interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other
obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in
leasing, hedging, or R&D services with the Company.
The following table presents certain payments due by the Company under contractual obligations with minimum firm commitments as of September 26, 2015,
and excludes amounts already recorded on the Consolidated Balance Sheet, except for term debt (in millions):
Payments Due in
Less Than 1 Year
Table of Contents
Payments Due in
4-5 Years
Term debt
$
Operating leases
Purchase commitments
Other obligations
Total
$
Table of Contents
Apple Inc. | 2015 Form 10-K | 32
Table of Contents
In September 2015, the Company introduced the iPhone Upgrade Program, which is available to customers who purchase an iPhone 6s and 6s Plus in one of its
U.S. physical retail stores and activate the purchased iPhone with one of the four 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's investment policy and strategy are focused on preservation of capital and supporting the Company's liquidity requirements. The Company uses
a combination of internal and external management to execute its investment strategy and achieve its investment objectives. 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 requires investments generally to be
investment grade, with the primary objective of minimizing the potential risk of principal loss. To provide a meaningful assessment of the interest rate risk
associated with the Company's investment portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates would have
on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 26, 2015 and
September 27, 2014, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $4.3 billion and $3.4 billion incremental
decline in the fair market value of the portfolio, respectively. Such losses would only be realized if the Company sold the investments prior to maturity.
As of September 26, 2015 and September 27, 2014, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate
carrying amount of $56.0 billion and $29.0 billion, respectively. The Company has entered, and may enter in the future, into interest rate swaps to manage
interest rate risk on its outstanding term debt. Interest rate swaps allow the Company to effectively convert fixed-rate payments into floating-rate payments or
floating-rate payments into fixed-rate payments. Gains and losses on these instruments are generally offset by the corresponding losses and gains on the
related hedging instrument. A 100 basis point increase in market interest rates would cause interest expense on the Company's debt as of September 26, 2015
and September 27, 2014 to increase by $200 million and $110 million on an annualized basis, respectively.
Further details regarding the Company's debt is provided in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, "Debt."
Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of
the U.S. dollar, will negatively affect the Company's net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to
adjust local currency product pricing due to competitive pressures when there have been significant volatility in foreign currency exchange rates.
The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with
certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. In addition,
the Company has entered, and may enter in the future, into non-designated foreign currency contracts to partially offset the foreign currency exchange gains and
losses on its foreign-denominated debt issuances. The Company's practice is to hedge a portion of its material foreign exchange exposures, typically for up to 12
months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting
considerations and the prohibitive economic cost of hedging particular exposures.
Apple Inc. | 2015 Form 10-K | 36
Table of Contents
To provide a meaningful assessment of the foreign currency risk associated with certain of the Company's foreign currency derivative positions, the Company
performed a sensitivity analysis using a value-at-risk ("VAR") model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted of
using a Monte Carlo simulation to generate thousands of random market price paths assuming normal market conditions. The VAR is the maximum expected
loss in fair value, for a given confidence interval, to the Company's foreign currency derivative positions due to adverse movements in rates. The VAR model is
not intended to represent actual losses but is used as a risk estimation and management tool. The model assumes normal market conditions. Forecasted
transactions, firm commitments and assets and liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model,
the Company estimates with 95% confidence a maximum one-day loss in fair value of $342 million as of September 26, 2015 compared to a maximum one-day
loss in fair value of $240 million as of September 27, 2014. Because the Company uses foreign currency instruments for hedging purposes, the loss in fair value
incurred on those instruments are generally offset by increases in the fair value of the underlying exposures.
Actual future gains and losses associated with the Company's investment portfolio and derivative positions may differ materially from the sensitivity analyses
performed as of September 26, 2015 due to the inherent limitations associated with predicting the timing and amount of changes in interest rates, foreign
currency exchanges rates and the Company's actual exposures and positions.
Apple Inc. | 2015 Form 10-K | 37
Table of Contents
Item 8.
Financial Statements and Supplementary Data
The Company's exposure to changes in interest rates relates primarily to the Company's investment portfolio and outstanding debt. While the Company is
exposed to global interest rate fluctuations, the Company's interest income and expense are most sensitive to fluctuations in U.S. interest rates. Changes in U.S.
interest rates affect the interest earned on the Company's cash, cash equivalents and marketable securities and the fair value of those securities, as well as
costs associated with hedging and interest paid on the Company's debt.
Index to Consolidated Financial Statements
Consolidated Statements of Shareholders' Equity for the years ended September 26, 2015, September 27, 2014, and September 28, 2013
Consolidated Statements of Cash Flows for the years ended September 26, 2015, September 27, 2014, and September 28, 2013
Notes to Consolidated Financial Statements
Selected Quarterly Financial Information (Unaudited)
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
Page
39
40
41
42
43
44
68
69
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Apple Inc. | 2015 Form 10-K | 38
Consolidated Statements of Operations for the years ended September 26, 2015, September 27, 2014, and September 28, 2013
Consolidated Statements of Comprehensive Income for the years ended September 26, 2015, September 27, 2014, and September 28, 2013
Consolidated Balance Sheets as of September 26, 2015 and September 27, 2014
Interest Rate Risk
The Company regularly reviews its foreign exchange forward and option positions and interest rate swaps, both on a stand-alone basis and in conjunction with
its underlying foreign currency and interest rate related exposures. Given the effective horizons of the Company's risk management activities and the anticipatory
nature of the exposures, there can be no assurance these positions will offset more than a portion of the financial impact resulting from movements in either
foreign exchange or interest rates. Further, the recognition of the gains and losses related to these instruments may not coincide with the timing of gains and
losses related to the underlying economic exposures and, therefore, may adversely affect the Company's financial condition and operating results.
Interest Rate and Foreign Currency Risk Management
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.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles ("GAAP") and the Company's
discussion and analysis of its financial condition and operating results require the Company's management to make judgments, assumptions and estimates that
affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, "Summary of Significant Accounting Policies," of the Notes
to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the
Company's consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates, and such differences may be material.
Management believes the Company's critical accounting policies and estimates are those related to revenue recognition, valuation and impairment of marketable
securities, inventory valuation and valuation of manufacturing-related assets and estimated purchase commitment cancellation fees, warranty costs, income
taxes, and legal and other contingencies. Management considers these policies critical because they are both important to the portrayal of the Company's
financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company's
senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company's Board of
Directors.
Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection
is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For
most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education
customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion
of the risk of loss on these sales during transit. For payment terms in excess of the Company's standard payment terms, revenue is recognized as payments
become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without
concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is
essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting
guidance. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the
hardware.
For multi-element arrangements that include hardware products containing software essential to the hardware product's functionality, undelivered software
elements that relate to the hardware product's essential software and/or undelivered non-software services, the Company allocates revenue to all deliverables
based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE") and (iii) best estimate of selling price
("ESP"). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable.
ESPs reflect the Company's best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.
Apple Inc. | 2015 Form 10-K | 33
Table of Contents
For sales of qualifying versions of iOS devices, Mac, Apple Watch and Apple TV, the Company has indicated it may from time to time provide future unspecified
software upgrades to the device's essential software and/or non-software services free of charge. Because the Company has neither VSOE nor TPE for the
unspecified software upgrade rights or the non-software services, revenue is allocated to these rights and services based on the Company's ESPs. Revenue
allocated to the unspecified software upgrade rights and non-software services based on the Company's ESPs is deferred and recognized on a straight-line
basis over the estimated period the software upgrades and non-software services are expected to be provided.
The Company's process for determining ESPs involves management's judgment and considers multiple factors that may vary over time depending upon the
unique facts and circumstances related to each deliverable. Should future facts and circumstances change, the Company's ESPs and the future rate of related
amortization for unspecified software upgrades and non-software services related to future sales of these devices could change. Factors subject to change
include the unspecified software upgrade rights and non-software services offered, the estimated value of unspecified software upgrade rights and non-software
services and the estimated period unspecified software upgrades and non-software services are expected to be provided.
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions
involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and
reliably estimated and the other conditions for revenue recognition have been met. The Company's policy requires that, if refunds cannot be reliably estimated,
revenue is not recognized until reliable estimates can be made or the price protection lapses. For the Company's other customer incentive programs, the
estimated cost is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also
records reductions to revenue for expected future product returns based on the Company's historical experience. Future market conditions and product
transitions may require the Company to increase customer incentive programs that could result in reductions to future revenue. Additionally, certain customer
incentive programs require management to estimate the number of customers who will actually redeem the incentive. Management's estimates are based on
historical experience and the specific terms and conditions of particular incentive programs. If a greater than estimated proportion of customers redeems such
incentives, the Company would be required to record additional reductions to revenue, which would have an adverse impact on the Company's operating results.
Valuation and Impairment of Marketable Securities
The Company's investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of
securities are recognized in accumulated other comprehensive income, net of tax, in the Company's Consolidated Balance Sheets. Changes in the fair value of
available-for-sale securities impact the Company's net income only when such securities are sold or an other-than-temporary impairment is recognized. Realized
gains and losses on the sale of securities are determined by specific identification of each security's cost basis. The Company regularly reviews its investment
portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the period any such
determination is made. In making this judgment, the Company evaluates, among other things, the duration and extent to which the fair value of a security is less
than its cost; the financial condition of the issuer and any changes thereto; and the Company's intent to sell, or whether it will more likely than not be required to
sell, the security before recovery of its amortized cost basis. The Company's assessment on whether a security is other-than-temporarily impaired could change
in the future due to new developments or changes in assumptions related to any particular security, which would have an adverse impact on the Company's
operating results.
Inventory Valuation and Valuation of Manufacturing-Related Assets and Estimated Purchase Commitment Cancellation Fees
The Company must purchase components and build inventory in advance of product shipments and has invested in manufacturing-related assets, including
capital assets held at its suppliers' facilities. In addition, the Company has made prepayments to certain of its suppliers associated with long-term supply
agreements to secure supply of inventory components. The Company records a write-down for inventories of components and products, including third-party
products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company performs a detailed review
of inventory that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels and component
cost trends. The Company also reviews its manufacturing-related capital assets and inventory prepayments for impairment whenever events or circumstances
indicate the carrying amount of such assets may not be recoverable. If the Company determines that an asset is not recoverable, it records an impairment loss
equal to the amount by which the carrying value of such an asset exceeds its fair value.
The industries in which the Company competes are subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. In
certain circumstances the Company may be required to record additional write-downs of inventory and/or manufacturing-related assets. These circumstances
include future demand or market conditions for the Company's products being less favorable than forecasted, unforeseen technological changes or changes to
the Company's product development plans that negatively impact the utility of any of these assets, or significant deterioration in the financial condition of one or
more of the Company's suppliers that hold any of the Company's manufacturing-related assets or to whom the Company has made an inventory prepayment.
Such write-downs would adversely affect the Company's financial condition and operating results in the period when the write-downs were recorded.
Quantitative and Qualitative Disclosures About Market Risk
Item 7A.
Table of Contents
As discussed in Part I, Item 3 of this Form 10-K under the heading "Legal Proceedings" and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated
Financial Statements in Note 10, “Commitments and Contingencies," the Company is subject to various legal proceedings and claims that arise in the ordinary
course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is
significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management,
there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to
loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is subject to
significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were
resolved against the Company in a reporting period for amounts in excess of management's expectations, the Company's consolidated financial statements for
that reporting period could be materially adversely affected.
Legal and Other Contingencies
Management believes it is more likely than not that forecasted income, including income that may be generated as result of certain tax planning strategies,
together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event that the Company
determines all or part of the net deferred tax assets are not realizable in the future, the Company will record an adjustment to the valuation allowance that would
be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management's
expectations could have a material impact on the Company's financial condition and operating results.
2,488
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Income Taxes
The Company accrues for the estimated cost of warranties at the time the related revenue is recognized based on historical and projected warranty claim rates,
historical and projected cost-per-claim and knowledge of specific product failures that are outside of the Company's typical experience. The Company regularly
reviews these estimates to assess the adequacy of its recorded warranty liabilities or the current installed base of products subject to warranty protection and
adjusts the amounts as necessary. If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liabilities would be
required and could materially affect the Company's financial condition and operating results.
Warranty Costs
The Company accrues for estimated cancellation fees related to inventory orders that have been cancelled or are expected to be cancelled. Consistent with
industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders in each case based on
projected demand. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier.
Purchase commitments typically cover the Company's forecasted component and manufacturing requirements for periods up to 150 days. If there is an abrupt
and substantial decline in demand for one or more of the Company's products, a change in the Company's product development plans, or an unanticipated
change in technological requirements for any of the Company's products, the Company may be required to record additional accruals for cancellation fees that
would adversely affect its results of operations in the period when the cancellation fees are identified and recorded.
Table of Contents
Apple Inc. | 2015 Form 10-K | 34
The Company records a tax provision for the anticipated tax consequences of its reported operating results. The provision for income taxes is computed using
the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities
are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be
realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
2012
Payments Due in
1-3 Years
1,082
2014
13,973 $
26.1%
2013
13,118
26.2%
The Company's effective tax rates for 2015, 2014 and 2013 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 higher effective tax rate during 2015 compared to 2014 was due primarily to higher foreign taxes. The
effective tax rate in 2014 compared to 2013 was relatively flat.
As of September 26, 2015, the Company had deferred tax assets arising from deductible temporary differences, tax losses and tax credits of $7.8 billion and
deferred tax liabilities of $24.1 billion. Management believes it is more likely than not that forecasted income, including income that may be generated as a result
of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets.
The Company will continue to evaluate the realizability of deferred tax assets quarterly by assessing the need for and the amount of a valuation allowance.
The U.S. Internal Revenue Service is currently examining the years 2010 through 2012, and all years prior to 2010 are closed. In addition, the Company is
subject to audits by state, local and foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open
and could be subject to examination by the taxing authorities. 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.
34,596
Apple Inc. | 2015 Form 10-K | 29
Table of Contents
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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.
The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2018. In August 2015, the FASB issued
ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one
year and permits early adoption as early as the original effective date of ASU 2014-09. Accordingly, the Company may adopt the standard in either its first
quarter of 2018 or 2019. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect
recognized as of the date of adoption. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its
consolidated financial statements.
Liquidity and Capital Resources
2015
19,121 $
26.4%
The following table presents selected financial information and statistics as of and for the years ended September 26, 2015, September 27, 2014 and
September 28, 2013 (in millions):
2014
2013
Cash, cash equivalents and marketable securities
Property, plant and equipment, net
Commercial paper
Total term debt
Working capital
Cash generated by operating activities
Cash used in investing activities
Cash used in financing activities
$ 205,666 $ 155,239 $ 146,761
$ 22,471 $ 20,624 $ 16,597
$ 8,499 $
$ 55,963 $ 28,987
AAAAAAAAAA
69 69
6,308 $
2015
$
Provision for income taxes
Effective tax rate
Provision for income taxes and effective tax rates for 2015, 2014 and 2013 are as follows (dollars in millions):
Other income/(expense), net for 2015, 2014 and 2013 are as follows (dollars in millions):
Interest and dividend income
Interest expense
Other expense, net
Total other income/(expense), net
2015
Change
2014
Change
2013
$
2,921
$
1,795
$
1,616
(733)
Provision for Income Taxes
The increase in other income/(expense), net during 2015 compared to 2014 was due primarily to higher interest income, partially offset by higher expenses
associated with foreign exchange activity and higher interest expense on debt. The decrease in other income and expense during 2014 compared to 2013 was
due primarily to higher interest expense on debt and higher expenses associated with foreign exchange rate movements, partially offset by lower premium
expenses on foreign exchange contracts and higher interest income. The weighted-average interest rate earned by the Company on its cash, cash equivalents
and marketable securities was 1.49%, 1.11% and 1.03% in 2015, 2014 and 2013, respectively.
1,156
$
(15)%
980
$
31% $
$
(324)
(431)
(903)
(136)
(384)
1,285
0
16,960
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 September 26, 2015 the Company is unable to estimate the impact.
8,768 $
In April 2015, the Company's Board of Directors increased the share repurchase program authorization from $90 billion to $140 billion of the Company's
common stock, increasing the expected total size of the capital return program to $200 billion. The Company expects to execute the capital return program by
the end of March 2017 by paying dividends and dividend equivalents, repurchasing shares and remitting withheld taxes related to net share settlement of
restricted stock units. To assist in funding its capital return program, the Company expects to continue to access the debt markets, both domestically and
internationally. As of September 26, 2015, $104 billion of the share repurchase program has been utilized. The Company's share repurchase program does not
obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions,
including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
In April 2015, the Company's Board of Directors raised the quarterly cash dividend by 11%. The Company plans to increase its dividend on an annual basis
subject to declaration by the Board of Directors.
The following table presents the Company's dividends, dividend equivalents, share repurchases and net share settlement activity from the start of the capital
return program in August 2012 through September 26, 2015 (in millions):
Dividends and
Dividend
Equivalents Paid
Accelerated Share
Repurchases
Open Market
Share
Repurchases
Taxes Related
to Settlement of
Equity Awards
Total
2015
$
11,561 $
6,000
Capital Return Program
$
$
1,499
$
49,086
2014
$
21,000
24,000
1,158
57,284
2013
10,564
13,950
9,000
30,026
Further information regarding the Company's debt issuances and related hedging activity can be found in Part II, Item 8 of this Form 10-K in the Notes to the
Consolidated Financial Statements in Note 2, "Financial Instruments" and Note 6, "Debt."
11,126
34,345
Apple Inc. | 2015 Form 10-K | 30
During 2014, cash generated from operating activities of $59.7 billion was a result of $39.5 billion of net income, non-cash adjustments to net income of $13.2
billion and an increase in net change in operating assets and liabilities of $7.0 billion. Cash used in investing activities of $22.6 billion during 2014 consisted
primarily of cash used for purchases of marketable securities, net of sales and maturities, of $9.0 billion; cash used to acquire property, plant and equipment of
$9.6 billion; and cash paid for business acquisitions, net of cash acquired, of $3.8 billion. Cash used in financing activities of $37.5 billion during 2014 consisted
primarily of cash used to repurchase common stock of $45.0 billion and cash used to pay dividends and dividend equivalents of $11.1 billion, partially offset by
net proceeds from the issuance of term debt and commercial paper of $12.0 billion and $6.3 billion, respectively.
During 2015, cash generated from operating activities of $81.3 billion was a result of $53.4 billion of net income, non-cash adjustments to net income of $16.2
billion and an increase in the net change in operating assets and liabilities of $11.7 billion. Cash used in investing activities of $56.3 billion during 2015 consisted
primarily of cash used for purchases of marketable securities, net of sales and maturities, of $44.4 billion and cash used to acquire property, plant and
equipment of $11.2 billion. Cash used in financing activities of $17.7 billion during 2015 consisted primarily of cash used to repurchase common stock of $35.3
billion and cash used to pay dividends and dividend equivalents of $11.6 billion, partially offset by net proceeds from the issuance of term debt of $27.1 billion.
As of September 26, 2015 and September 27, 2014, the Company's cash, cash equivalents and marketable securities held by foreign subsidiaries were $186.9
billion and $137.1 billion, respectively, and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject
to U.S. income taxation on repatriation to the U.S. The Company's marketable securities investment portfolio is invested primarily in highly-rated securities and
its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade with the
objective of minimizing the potential risk of principal loss.
The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working capital needs, capital
asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months. The Company
currently anticipates the cash used for future dividends, the share repurchase program and debt repayments will come from its current domestic cash, cash
generated from on-going U.S. operating activities and from borrowings.
$ (17,716) $ (37,549) $ (16,379)
Table of Contents
(56,274) $ (22,579) $ (33,774)
53,666
81,266 $ 59,713 $
$
$ 29,628
5,083
$ 55,701
$
Capital Assets
Apple Inc. | 2015 Form 10-K | 35
Debt
5,581
The Company's capital expenditures were $11.2 billion during 2015. The Company anticipates utilizing approximately $15.0 billion for capital expenditures during
2016, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems
hardware, software and enhancements; and retail store facilities.
3,775
3,500
$ 2,500
Total term debt
Thereafter
6,000
2019
2018
2017
2016
In 2014, the Board of Directors authorized the Company to issue unsecured short-term promissory notes ("Commercial Paper”) pursuant to a commercial paper
program. The Company intends to use the net proceeds from the commercial paper program for general corporate purposes, including dividends and share
repurchases. As of September 26, 2015, the Company had $8.5 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.14% and
maturities generally less than nine months.
2020
As of September 26, 2015, the Company has outstanding floating- and fixed-rate notes for an aggregate principal amount of $55.7 billion (collectively the
"Notes"). The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes. In addition, the Company
has entered, and in the future may enter, into currency swaps to manage foreign currency risk on the Notes. The future principal payments for the Company's
Notes as of September 26, 2015 are as follows (in millions):
3,031
3,624
63,448
0
2,500
6,308
8,499
53,463
80,610
28,987
Total liabilities
24,826
171,124
120,292
Other non-current liabilities
8,491
Commitments and contingencies
Shareholders' equity:
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 5,578,753 and
5,866,161 shares issued and outstanding, respectively
27,416
23,313
33,427
8,940
290,479 $
25,181
13,494
9,759
9,539
9,806
89,378
68,531
164,065
130,162
20,624
5,116
4,616
3,893
4,142
5,556
3,764
$
231,839
LIABILITIES AND SHAREHOLDERS' EQUITY:
$
35,490 $
30,196
18,453
22,471
Total shareholders' equity
4,318
Apple Inc. | 2015 Form 10-K | 39
Table of Contents
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
September 26,
2015
Net income
Other comprehensive income/(loss):
$
53,394
$
Years ended
September 27,
2014
39,510
September 28,
2013
$
37,037
See accompanying Notes to Consolidated Financial Statements.
Change in foreign currency translation, net of tax effects of $201, $50 and $35, respectively
Change in unrealized gains/losses on derivative instruments:
(137)
(112)
Change in fair value of derivatives, net of tax benefit/(expense) of $(441), $(297) and $(351), respectively
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of
$630, $(36) and $255, respectively
2,905
1,390
522
(3,497)
149
(458)
Total change in unrealized gains/losses on derivative instruments, net of tax
(592)
1,539
64
(411)
Change in unrealized gains/losses on marketable securities:
1.64
1.98 $
980
1,156
72,515
53,483
50,155
19,121
13,973
13,118
$
53,394
$
39,510 $
37,037
1.82 $
EA EA
9.28
$
$
9.22
6969
$
6.49 $
6.45 $
6969
5.72
5.68
5,753,421
5,793,069
6,085,572
6,122,663
6,477,320
6,521,634
$
$
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of
$(32), $71 and $82, respectively
Change in fair value of marketable securities, net of tax benefit/(expense) of $264, $(153) and $458,
respectively
Total change in unrealized gains/losses on marketable securities, net of tax
Total current assets
Long-term marketable securities
Property, plant and equipment, net
Goodwill
Acquired intangible assets, net
Other assets
Total assets
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Commercial paper
Current portion of long-term debt
Other current assets
Total current liabilities
Long-term debt
ASSETS:
September 26, September 27,
2015
2014
$
21,120 $
13,844
20,481
11,233
16,849
17,460
2,349
2,111
5,546
Deferred revenue, non-current
Vendor non-trade receivables
Deferred tax assets
Inventories
Total other comprehensive income/(loss)
Total comprehensive income
(483)
285
(791)
59
(134)
(131)
(424)
151
(922)
(1,427)
1,553
(970)
$
51,967
$
41,063
$
36,067
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 40
Table of Contents
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands and par value)
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, less allowances of $82 and $86, respectively
Retained earnings
92,284
(17,716)
Accumulated other comprehensive income
10,026
$
13,252
$
69 69
14,259
$
13,844
$
21,120
$
3,513
(415)
7,276
(16,379)
(37,549)
1,285
0
6,306
2,191
16,896
11,960
27,114
Cash paid for income taxes, net
Cash paid for interest
Supplemental cash flow disclosure:
$
9,128
$
514
Amounts billed to customers related to shipping and handling are classified as revenue, and the Company's shipping and handling costs are classified as cost of
sales.
Shipping Costs
Beginning in September 2015, the Company reduced the combined ESPs for iOS devices and Mac between $5 and $10 to reflect the increase in competitive
offers for similar products at little to no cost for users, which reduces the amount the Company could reasonably charge for these deliverables on a standalone
basis.
The Company's process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts
and circumstances related to each deliverable including, where applicable, prices charged by the Company and market trends in the pricing for similar offerings,
product specific business objectives, length of time a particular version of a device has been available, estimated cost to provide the non-software services and
the relative ESP of the upgrade rights and non-software services as compared to the total selling price of the product.
For sales of qualifying versions of iPhone, iPad and iPod touch ("iOS devices”), Mac, Apple Watch and Apple TV, the Company has indicated it may from time to
time provide future unspecified software upgrades to the device's essential software and/or non-software services free of charge. The Company has identified up
to three deliverables regularly included in arrangements involving the sale of these devices. The first deliverable, which represents the substantial portion of the
allocated sales price, is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is
the embedded right included with qualifying devices to receive on a when-and-if-available basis, future unspecified software upgrades relating to the product's
essential software. The third deliverable is the non-software services to be provided to qualifying devices. The Company allocates revenue between these
deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based
on the Company's ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale provided the other
conditions for revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and the non-software services is
deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. Cost
of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to
provide non-software services are recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating
expenses as incurred.
For multi-element arrangements that include hardware products containing software essential to the hardware product's functionality, undelivered software
elements that relate to the hardware product's essential software, and undelivered non-software services, the Company allocates revenue to all deliverables
based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of fair value ("VSOE”), (ii) third-party evidence of selling price ("TPE”) and (iii) best estimate of selling price
("ESP"). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable.
ESPs reflect the Company's best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element
arrangements accounted for in accordance with industry specific software accounting guidance, the Company allocates revenue to all deliverables based on the
VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
Revenue Recognition for Arrangements with Multiple Deliverables
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions
involving price protection, the Company recognizes revenue net of the estimated amount to be refunded. For the Company's other customer incentive programs,
the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is
offered. The Company also records reductions to revenue for expected future product returns based on the Company's historical experience. Revenue is
recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted
to the relevant government authority.
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts
that have been deferred for unspecified and specified software upgrade rights and non-software services that are attached to hardware and software products.
The Company sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on iTunes Store, App Store, Mac App Store and
iBooks Store for the purchase of digital content and software. The Company records deferred revenue upon the sale of the card, which is relieved upon
redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods.
AppleCare service and support contracts typically include extended phone support, repair services, web-based support resources and diagnostic tools offered
under the Company's standard limited warranty.
Table of Contents
Apple Inc. | 2015 Form 10-K | 44
For the sale of most third-party products, the Company recognizes revenue based on the gross amount billed to customers because the Company establishes its
own pricing for such products, retains related inventory risk for physical products, is the primary obligor to the customer and assumes the credit risk for amounts
billed to its customers. For third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, the
Company does not determine the selling price of the products and is not the primary obligor to the customer. Therefore, the Company accounts for such sales on
a net basis by recognizing in net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that is remitted by the
Company to third-party app developers and certain digital content owners is not reflected in the Company's Consolidated Statements of Operations.
Increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, end of the year
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection
is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For
most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education
customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion
of the risk of loss on these sales during transit. For payment terms in excess of the Company's standard payment terms, revenue is recognized as payments
become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without
concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is
essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting
guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the
hardware.
The Company's fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company's fiscal years 2015, 2014 and 2013 ended on
September 26, 2015, September 27, 2014 and September 28, 2013, respectively. An additional week is included in the first fiscal quarter approximately every six
years to realign fiscal quarters with calendar quarters. Fiscal years 2015, 2014 and 2013 each spanned 52 weeks. Unless otherwise stated, references to
particular years, quarters, months and periods refer to the Company's fiscal years ended in September and the associated quarters, months and periods of
those fiscal years.
The accompanying 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 consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for
fair financial statement presentation. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles
("GAAP") requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Basis of Presentation and Preparation
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 mid-sized
businesses and education, enterprise and government customers.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Table of Contents
Apple Inc. | 2015 Form 10-K | 43
See accompanying Notes to Consolidated Financial Statements.
0
$
339
Revenue Recognition
Apple Inc. | 2015 Form 10-K | 45
Cash used in financing activities
Proceeds from issuance of term debt, net
Cash used in investing activities
Other
Payments for acquisition of intangible assets
(8,165)
(9,571)
(11,247)
Payments for acquisition of property, plant and equipment
(496)
(3,765)
(343)
Payments made in connection with business acquisitions, net
104,130
189,301
107,447
Proceeds from sales of marketable securities
20,317
18,810
14,538
Proceeds from maturities of marketable securities
(148,489)
(217,128)
(166,402)
53,666
59,713
81,266
Financing activities:
(241)
(242)
(911)
(22,860)
(45,000)
(35,253)
(10,564)
(11,126)
(11,561)
(1,082)
(1,158)
(1,499)
701
739
749
Change in commercial paper, net
530
543
Repurchase of common stock
Dividends and dividend equivalents paid
Taxes paid related to net share settlement of equity awards
Excess tax benefits from equity awards
Proceeds from issuance of common stock
(33,774)
(22,579)
(56,274)
(160)
16
(26)
730
4,521
Table of Contents
The Company generally provides for the estimated cost of hardware and software warranties at the time the related revenue is recognized. The Company
assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates.
112,258
106,606
93,626
70,537
64,304
8,067
6,041
4,475
14,329
11,993
10,830
22,396
18,034
15,305
71,230
Apple Inc. | 2015 Form 10-K | 48
Level 3 - Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants would use in pricing the
asset or liability.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities
in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and
liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would
transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in
valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure
fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value
measurement:
Fair Value Measurements
The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The Company
typically amortizes its acquired intangible assets with definite useful lives over periods from three to seven years.
The Company does not amortize goodwill and intangible assets with indefinite useful lives, rather such assets are required to be tested for impairment at least
annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its goodwill and intangible
asset impairment tests in the fourth quarter of each year. The Company did not recognize any impairment charges related to goodwill or indefinite lived
intangible assets during 2015, 2014 and 2013. The Company established reporting units based on its current reporting structure. For purposes of testing
goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit. In 2015 and 2014, the Company's
goodwill was primarily allocated to the Americas and Europe reporting units.
The Company reviews property, plant and equipment, inventory component prepayments and certain identifiable intangibles, excluding goodwill, for impairment.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If
property, plant and equipment, inventory component prepayments and certain identifiable intangibles are considered to be impaired, the impairment to be
recognized equals the amount by which the carrying value of the assets exceeds its fair value.
Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets
170,910
182,795 $
$
233,715
140,089
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
Net sales
Cost of sales
Gross margin
Operating expenses:
Research and development
Selling, general and administrative
Total operating expenses
Operating income
Other income/(expense), net
Property, plant and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets, which
for buildings is the lesser of 30 years or the remaining life of the underlying building; between one to five years for machinery and equipment, including product
tooling and manufacturing process equipment; and the shorter of lease terms or ten years for leasehold improvements. The Company capitalizes eligible costs to
acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to internal-use software are
amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization
expense on property and equipment was $9.2 billion, $6.9 billion and $5.8 billion during 2015, 2014 and 2013, respectively.
Income before provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Shares used in computing earnings per share:
Basic
Diluted
Cash dividends declared per share
September 26,
2015
Years ended
September 27,
2014
September 28,
2013
$
Provision for income taxes
Warranty Costs
Property, Plant and Equipment
Inventories
Effect of dilutive securities
Weighted-average shares outstanding
$ 39,510 $ 37,037
53,394
$
Denominator:
Net income
Numerator:
2013
2014
2015
The following table shows the computation of basic and diluted earnings per share for 2015, 2014 and 2013 (net income in millions and shares in thousands):
Table of Contents
Apple Inc. | 2015 Form 10-K | 46
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of
shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding
if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the
Company's employee stock purchase plan, unvested restricted stock and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted
earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company's common
stock can result in a greater dilutive effect from potentially dilutive securities.
Earnings Per Share
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 5, "Income Taxes” for additional information.
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which
those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount
that is believed more likely than not to be realized.
Income Taxes
The Company recognizes expense related to share-based payment transactions in which it receives employee services in exchange for (a) equity instruments of
the Company or (b) liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity
instruments. Share-based compensation cost for restricted stock and restricted stock units ("RSUS”) is measured based on the closing fair market value of the
Company's common stock on the date of grant. The Company recognizes share-based compensation cost over the award's requisite service period on a
straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance conditions. The Company
recognizes a benefit from share-based compensation in the Consolidated Statements of Shareholders' Equity if an excess tax benefit is realized. In addition, the
Company recognizes the indirect effects of share-based compensation on R&D tax credits, foreign tax credits and domestic manufacturing deductions in the
Consolidated Statements of Operations. Further information regarding share-based compensation can be found in Note 9, "Benefit Plans."
Share-based Compensation
Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expense was $1.8 billion, $1.2 billion and
$1.1 billion for 2015, 2014 and 2013, respectively.
Advertising Costs
Research and development ("R&D") costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are
subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to
customers. In most instances, the Company's products are released soon after technological feasibility has been established and as a result software
development costs were expensed as incurred.
Software Development Costs
Weighted-average diluted shares
Basic earnings per share
5,753,421
39,648
5,793,069
6,085,572
37,091
6,122,663
The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts
receivable balances, credit quality of the Company's customers, current economic conditions and other factors that may affect the customers' ability to pay.
Allowance for Doubtful Accounts
Table of Contents
Apple Inc. | 2015 Form 10-K | 47
Derivatives that do not qualify as hedges are adjusted to fair value through earnings in the current period.
For derivative instruments and foreign currency debt that hedge the exposure to changes in foreign currency exchange rates used for translation of the net
investment in a foreign operation and that are designated as a net investment hedge, the net gain or loss on the effective portion of the derivative instrument is
reported in the same manner as a foreign currency translation adjustment. For forward exchange contracts designated as net investment hedges, the Company
excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to
this forward carry component are recognized in earnings in the current period.
For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges, both the net
gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings in the current period.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of
the gain or loss on the derivative instrument is reported as a component of AOCI in shareholders' equity and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in
earnings in the current period. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash
flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness
and are recognized in earnings.
87,152
Derivative Financial Instruments
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company's marketable debt
and equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at
the time of purchase and reevaluates the classifications at each balance sheet date. The Company classifies its marketable debt securities as either short-term
or long-term based on each instrument's underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as
short-term and marketable debt securities with maturities greater than 12 months are classified as long-term. Marketable equity securities, including mutual
funds, are classified as either short-term or long-term based on the nature of each security and its availability for use in current operations. The Company's
marketable debt and equity securities are carried at fair value, with unrealized gains and losses, net of taxes, reported as a component of accumulated other
comprehensive income ("AOCI") in shareholders' equity, with the exception of unrealized losses believed to be other-than-temporary which are reported in
earnings in the current period. The cost of securities sold is based upon the specific identification method.
Cash Equivalents and Marketable Securities
Inventories are stated at the lower of cost, computed using the first-in, first-out method and net realizable value. Any adjustments to reduce the cost of
inventories to their net realizable value are recognized in earnings in the current period. As of September 26, 2015 and September 27, 2014, the Company's
inventories consist primarily of finished goods.
Financial Instruments
5.68
5.72
6969
6.45 $
9.22 $
$
6.49 $
9.28 $
$
6969
Diluted earnings per share
6,477,320
44,314
6,521,634
Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share.
6,010
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
1,459
0
0
39,510
0
39,510
0
0
123,549
(471)
104,256
19,764
6,294,494
1,232
0
0
1,232
0
(587)
0
(444)
(143)
48,873
2,253
0
0
0
1,553
1,553
Dividends and dividend equivalents declared
Repurchase of common stock
0
pricing adjustments
Tax benefit from equity awards, including transfer
(448)
0
(399)
(49)
60,344
employee taxes
Common stock issued, net of shares withheld for
2,863
0
2,253
0
0
Share-based compensation
(45,000)
0
(45,000)
0
(488,677)
(11,215)
0
(11,215)
0
0
2,863
0
(22,950)
(22,950)
Net income
Balances as of September 29, 2012
pricing adjustments
employee taxes
Share-based compensation
Total
Shareholders'
Equity
Comprehensive
Income/(Loss)
Retained
Earnings
Amount
Shares
Accumulated
Other
Common Stock and
Additional Paid-In Capital
Other comprehensive income/(loss)
Dividends and dividend equivalents declared
Repurchase of common stock
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except number of shares which are reflected in thousands)
Apple Inc. | 2015 Form 10-K | 41
See accompanying Notes to Consolidated Financial Statements.
231,839
290,479 $
$
111,547
119,355
1,082
(345)
Total liabilities and shareholders' equity
52,503
8,746
Table of Contents
735
Common stock issued, net of shares withheld for
Balances as of September 28, 2013
0
(328,837)
(10,676)
0
(10,676)
0
0
(970)
(970)
0
0
0
Tax benefit from equity awards, including transfer
37,037
37,037
0
0
$ 118,210
499
$
$ 101,289
16,422
$
6,574,458
Other comprehensive income/(loss)
Net income
0
0
48,999
Balances as of September 27, 2014
$
14,259
$
13,844
$
Purchases of marketable securities
Investing activities:
Cash generated by operating activities
Other current and non-current liabilities
Deferred revenue
Accounts payable
Other current and non-current assets
Vendor non-trade receivables
Inventories
Changes in operating assets and liabilities:
Accounts receivable, net
Deferred income tax expense
Share-based compensation expense
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization
Net income
Cash and cash equivalents, beginning of the year
Operating activities:
2013
2014
September 28,
Years ended
September 27,
September 26,
2015
10,746
53,394
39,510
37,037
Share-based compensation
1,460
1,042
2,340
5,938
5,400
1,080
167
(179)
223
(2,220)
(3,735)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(973)
(238)
(2,172)
(4,232)
611
2,347
1,382
2,253
2,863
3,586
6,757
7,946
11,257
(76)
Table of Contents
1,141
See accompanying Notes to Consolidated Financial Statements.
0
(11,627)
0
0
(1,427)
(1,427)
0
0
0
53,394
735
111,547
020
(11,627)
53,394
0
87,152
23,313
5,866,161
Balances as of September 26, 2015
pricing adjustments
Tax benefit from equity awards, including transfer
Common stock issued, net of shares withheld for
employee taxes
Dividends and dividend equivalents declared
Repurchase of common stock
Apple Inc. | 2015 Form 10-K | 42
Net income
Other comprehensive income/(loss)
0
(325,032)
1,082
(36,026)
(345)
$
0
119,355
$
92,284
$
$
5,578,753
748
0
0
748
27,416
(840)
3,586
0
(36,026)
0
0
0
3,586
0
37,624
(231)
(609)
0
28,987
Apple Inc. | 2015 Form 10-K | 58
$
Floating-rate notes
To manage foreign currency risk associated with the euro-denominated notes issued in the first quarter of 2015 and the British pound-denominated, Australian
dollar-denominated and euro-denominated notes issued in the fourth quarter of 2015, the Company entered into currency swaps with an aggregate notional
amount of $3.5 billion, $1.9 billion, $1.6 billion and $2.2 billion, respectively, which effectively converted these notes to U.S. dollar-denominated notes.
Third quarter 2015 debt issuance of $8.0 billion:
0
0
oo
0
oo
0.74%
53,463
2030
384
0
$
0
29,000
(2,500)
Fixed-rate 2.000% notes
Fixed-rate 0.750% notes
Total term debt
Unamortized discount
2027
1,113
3.85%
55,701
oo
0
0
Hedge accounting fair value adjustments
Less: Current portion of long-term debt
Total long-term debt
(114)
376
(52)
39
0
0.28%
0.56%
2024
2022
Fixed-rate 2.15% notes
0
1,250
2020
Fixed-rate 1.55% notes
0
0.56%
500
2020
Floating-rate notes
Second quarter 2015 debt issuance of $6.5 billion:
0
0
oo
0
0
1,250
0.87%
Fixed-rate 2.50% notes
2025
Fixed-rate 0.375% notes
Second quarter 2015 Swiss franc-denominated debt issuance of SFr1.25 billion:
0
0
0
0
0
ooooo
895
OOOOO
3.58%
2,000
677
2045
Fixed-rate 3.45% notes
0
2.60%
1,500
0
3.30%
ooooooo
2024
Fixed-rate 4.375% notes
2045
2,000
4.40%
3.45%
0
0
0
0
ooooooo
0
0
0
0
0
0
0
1.22%
Third quarter 2015 Japanese yen-denominated debt issuance of ¥250.0 billion:
Fixed-rate 0.35% notes
2,000
Fixed-rate 3.200% notes
0.36%
Floating-rate notes
2020
500
0.61%
Fixed-rate 0.900% notes
2017
750
0.35%
Fixed-rate 2.000% notes
2020
1,250
0.61%
Fixed-rate 2.700% notes
2022
1,250
0.99%
2025
1,113
2020
0.35%
0
Fixed-rate 2.85% notes
2019
282
1.89%
Fixed-rate 3.70% notes
2022
810
2.79%
0
ooo
ooo
0
0
0
Fourth quarter 2015 euro-denominated debt issuance of € 2.0 billion:
Fixed-rate 1.375% notes
1.87%
2,081
493
Floating-rate notes
0
0
Fourth quarter 2015 British pound-denominated debt issuance of £1.25 billion:
Fixed-rate 3.05% notes
2029
1,148
3.79%
Fixed-rate 3.60% notes
2042
766
4.51%
oo
0
0
0
0
Fourth quarter 2015 Australian dollar-denominated debt issuance of A$2.25 billion:
2019
1,558
The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2015 and 2014 (in millions):
Fixed-rate 1.625% notes
1,787
1,941
898
2,238
4,205 $ 3,326
$
2014
2015
Net deferred tax liabilities
Other
Unremitted earnings of foreign subsidiaries
Deferred tax liabilities:
Total deferred tax assets, net of valuation allowance of $0
Other
Unrealized losses
Share-based compensation
Deferred cost sharing
667
Deferred revenue
0
454
Beginning Balance
The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2015, 2014 and 2013, is as follows (in
millions):
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 affect the Company's
effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would
affect the Company's effective tax rate.
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon
examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the
financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The
Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as
non-current liabilities in the Consolidated Balance Sheets.
Uncertain Tax Positions
Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled.
303
27,171
$ (16,260) $ (15,120)
21,942
398
21,544
26,868
6,822
10,911
227
721
130
564
575
Increases related to tax positions taken during a prior year
Decreases related to tax positions taken during a prior year
Basis of capital assets and investments
Deferred tax assets:
Domestic production activities deduction
Indefinitely invested earnings of foreign subsidiaries
State taxes, net of federal effect
Computed expected tax
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35% in 2015, 2014 and 2013) to
income before provision for income taxes for 2015, 2014 and 2013, is as follows (dollars in millions):
As of September 26, 2015 and September 27, 2014, $186.9 billion and $137.1 billion, respectively, of the Company's cash, cash equivalents and marketable
securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally
subject to U.S. income taxation on repatriation to the U.S.
The foreign provision for income taxes is based on foreign pre-tax earnings of $47.6 billion, $33.6 billion and $30.5 billion in 2015, 2014 and 2013, respectively.
The Company's consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be
indefinitely reinvested outside the U.S. Substantially all of the Company's undistributed international earnings intended to be indefinitely reinvested in operations
outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of September 26, 2015, U.S. income taxes
have not been provided on a cumulative total of $91.5 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary
differences is estimated to be $30.0 billion.
$ 19,121 $ 13,973 $ 13,118
1,133
1,489
2,938
(426)
(658)
(1,806)
1,559
2,147
4,744
Research and development credit, net
Accrued liabilities and other reserves
Other
2015
$ 25,380
As of September 26, 2015 and September 27, 2014, the significant components of the Company's deferred tax assets and liabilities were (in millions):
Table of Contents
Apple Inc. | 2015 Form 10-K | 55
The Company's income taxes payable have been reduced by the tax benefits from employee stock plan awards. For stock options, the Company receives an
income tax benefit calculated as the tax effect of the difference between the fair market value of the stock issued at the time of the exercise and the exercise
price. For RSUs, the Company receives an income tax benefit upon the award's vesting equal to the tax effect of the underlying stock's fair market value. The
Company had net excess tax benefits from equity awards of $748 million, $706 million and $643 million in 2015, 2014 and 2013, respectively, which were
reflected as increases to common stock.
26.2%
26.1%
26.4%
$ 19,121 $ 13,973 $ 13,118
112
128
(6,470)
(426)
(171)
333
508
(4,614)
(308)
(287)
265
2013
$ 17,554
469
(4,744)
(495)
(88)
2014
$ 18,719
680
Provision for income taxes
Effective tax rate
2026
Increases related to tax positions taken during the current year
Decreases related to settlements with taxing authorities
Decreases related to expiration of statute of limitations
Ending Balance
2014
$
2016 - 2018
2016 - 2043
Fixed-rate 0.45% - 3.85% notes
2013 debt issuance of $17.0 billion:
Floating-rate notes
Effective
Interest Rate
2014
(in millions)
Amount
Effective
Interest Rate
Maturities
(in millions)
Amount
2015
The following table provides a summary of the Company's term debt as of September 26, 2015 and September 27, 2014:
Table of Contents
Apple Inc. | 2015 Form 10-K | 57
As of September 26, 2015, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $55.7 billion
(collectively the "Notes"). The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the U.S. dollar-denominated and Australian
dollar-denominated floating-rate notes, semi-annually for the U.S. dollar-denominated, Australian dollar-denominated, British pound-denominated and Japanese
yen-denominated fixed-rate notes and annually for the euro-denominated and Swiss franc-denominated fixed-rate notes.
3,000
14,000
Long-Term Debt
0.51% 1.10%
0.51% 3.91%
0.51% 1.10%
0.51% 3.91%
0
2.94%
1,558
2022
First quarter 2015 euro-denominated debt issuance of € 2.8 billion:
0.31% -0.54%
2,000
10,000 0.30% 4.48%
0.37% -4.48%
10,000
2017 - 2044
0.37% -0.60%
2,000
2017-2019
Fixed-rate 1.000% notes
Fixed-rate 1.05% - 4.45% notes
Floating-rate notes
2014 debt issuance of $12.0 billion:
$ 3,000
14,000
2015
$ 2,191 $ 6,306
(3,102)
Apple Inc. | 2015 Form 10-K | 56
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of September 26, 2015 and
September 27, 2014, the total amount of gross interest and penalties accrued was $1.3 billion and $630 million, respectively, which is classified as non-current
liabilities in the Consolidated Balance Sheets. In connection with tax matters, the Company recognized interest and penalty expense in 2015, 2014 and 2013 of
$709 million, $40 million and $189 million, respectively.
$ 6,900 $ 4,033 $ 2,714
626
(592)
(9)
(4)
(574)
(109)
(13)
882
1,278
745
(118)
(280)
(345)
2,062
2,714 $
1,295
4,033 $
2,056
$
2013
Table of Contents
4,441
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal
Revenue Service (the "IRS") is currently examining the years 2010 through 2012, and all years prior to 2010 are closed. In addition, the Company is subject to
audits by state, local and foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open and could
be subject to examination by the taxing authorities.
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 September 26, 2015 the Company is unable to estimate the impact.
(330)
4,771
3,851
(6,953)
5,293 $ 1,865
$
2014
2015
Total change in commercial paper, net
Maturities greater than 90 days, net
Proceeds from commercial paper
Repayments of commercial paper
Maturities greater than 90 days:
Proceeds from (repayments of) commercial paper, net
Maturities less than 90 days:
In 2014, the Board of Directors authorized the Company to issue unsecured short-term promissory notes ("Commercial Paper”) pursuant to a commercial paper
program. The Company intends to use net proceeds from the commercial paper program for general corporate purposes, including dividends and share
repurchases. As of September 26, 2015 and September 27, 2014, the Company had $8.5 billion and $6.3 billion of Commercial Paper outstanding, respectively,
with a weighted-average interest rate of 0.14% and 0.12%, respectively, and maturities generally less than nine months.
Commercial Paper
Note 6 Debt
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax
audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's
expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution
and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the
next 12 months.
Total deferred tax liabilities
773
Table of Contents
143
Gains/(Losses) reclassified from AOCI into net income – effective portion:
EA
$
4,092
$
(154) $
676
(17)
(16)
(6)
$
4,075
$
(170) $
$
670
53
$
891
12
$
3,481
$
1,735
$
903
$
EA
167 $
53 $
143
(71)
0
96 $
1,750 $
(15)
$
39 $
69 69
$
$
70,054 $
18,750 $
1,385 $
394 $
42,945 $
12,000 $
1,333
89
$
49,190 $
109 $
38,510 $
222
Apple Inc. | 2015 Form 10-K | 52
Table of Contents
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.
Credit Risk
Amount
337 $
Notional
Amount
Notional
Amount
Gains/(Losses) related to hedged items:
Fair value hedges:
Interest rate contracts
$
(337) $
(39) $
0
The following table shows the notional amounts of the Company's outstanding derivative instruments and credit risk amounts associated with outstanding or
unsettled derivative instruments as of September 26, 2015 and September 27, 2014 (in millions):
Instruments designated as accounting hedges:
Foreign exchange contracts
Interest rate contracts
Instruments not designated as accounting hedges:
Foreign exchange contracts
2015
2014
Credit Risk
Amount
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the
same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or
posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets
and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. The net cash collateral received by the Company related to derivative
instruments under its collateral security arrangements was $1.0 billion as of September 26, 2015 and $2.1 billion as of September 27, 2014.
(111)
Fair value hedges:
$
13
Table of Contents
Fair Value of
Derivatives Designated
as Hedge Instruments
2014
Fair Value of
Derivatives Not Designated
as Hedge Instruments
Total
Fair Value
Derivative assets (1):
Foreign exchange contracts
$ 1,332
$
222
$
Interest rate contracts
999
$
$
94
$
0
$
6969
$
1,551
394
SA SA
$ 905
$
13
6969
$
$
$°
EA EA
Interest rate contracts
81
0
Cash flow hedges:
Foreign exchange contracts
$
3,592 $
Interest rate contracts
Total
Net investment hedges:
Foreign exchange contracts
Foreign currency debt
Total
Cash flow hedges:
Foreign exchange contracts
Interest rate contracts
Total
Gains/(Losses) on derivative instruments:
Gains/(Losses) recognized in OCI - effective portion:
$
2013
2015
$
1,554
81
Derivative liabilities (2):
Foreign exchange contracts
$
41
$
40
$
81
(1)
The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the Consolidated Balance
Sheets.
(2)
The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses in the Consolidated Balance
Sheets.
The following 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 Consolidated Statements of Operations for 2015, 2014 and 2013 (in millions):
2014
109
Under master netting arrangements with the respective counterparties to the Company's derivative contracts, the Company is allowed to net settle transactions
with a single net amount payable by one party to the other. As of September 26, 2015 and September 27, 2014, 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 $2.2 billion and $1.6 billion, respectively, resulting in net derivative liabilities of $78 million and $549 million, respectively.
Trade Receivables
100
$
7,227
$
(3,085)
$
4,142
Amortization expense related to acquired intangible assets was $1.3 billion, $1.1 billion and $960 million in 2015, 2014 and 2013, respectively. As of
September 26, 2015, the remaining weighted-average amortization period for acquired intangible assets is 3.6 years. The expected annual amortization expense
related to acquired intangible assets as of September 26, 2015, is as follows (in millions):
2016
2017
2018
2019
2020
Thereafter
Total
0
1,288
100
(4,332) $
$
8,125
$
(4,332) $
3,793
$
7,127
$
(3,085) $
4,042
Indefinite-lived and non-amortizable
acquired intangible assets
Total acquired intangible assets
$
100
8,225 $
100
3,893
intangible assets
1,033
342
2013
$ 11,730 $ 8,624 $ 9,334
3,408
3,183
1,878
15,138
11,807
11,212
1,265
855
1,084
(220)
(178)
(311)
1,045
2014
786
2015
Current
Deferred
166
178
$
3,793
Apple Inc. | 2015 Form 10-K | 54
Table of Contents
Note 5 Income Taxes
The provision for income taxes for 2015, 2014 and 2013, consisted of the following (in millions):
Federal:
Current
Deferred
State:
Current
Deferred
Foreign:
Provision for income taxes
Accounts Receivable
Definite-lived and amortizable acquired
Accumulated
Amortization
49,257
(26,786)
$ 22,471
39,015
(18,391)
$ 20,624
Apple Inc. | 2015 Form 10-K | 53
Table of Contents
Other Non-Current Liabilities
Deferred tax liabilities
Other non-current liabilities
Total other non-current liabilities
Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for 2015, 2014 and 2013 (in millions):
Interest and dividend income
Interest expense
Other expense, net
5,263
Total other income/(expense), net
4,513
4,863
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers, small
and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers;
however, the Company will require collateral in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade
receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing
arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or
credit risk sharing related to any of these arrangements.
As of September 26, 2015, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 12%. As of
September 27, 2014, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 16% and the other
13%. The Company's cellular network carriers accounted for 71% and 72% of trade receivables as of September 26, 2015 and September 27, 2014,
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. The Company purchases these components directly from suppliers. Vendor non-trade receivables
from three of the Company's vendors accounted for 38%, 18% and 14% of total vendor non-trade receivables as of September 26, 2015 and three of the
Company's vendors accounted for 51%, 16% and 14% of total vendor non-trade receivables as of September 27, 2014.
Note 3 - Consolidated Financial Statement Details
The following tables show the Company's consolidated financial statement details as of September 26, 2015 and September 27, 2014 (in millions):
Property, Plant and Equipment, Net
Land and buildings
Machinery, equipment and internal-use software
Leasehold improvements
Gross property, plant and equipment
Accumulated depreciation and amortization
Total property, plant and equipment, net
2015
2014
$ 6,956
37,038
$
29,639
Net Carrying
Amount
Note 4 - Goodwill and Other Intangible Assets
2014
$
1,285
$
980 $
1,156
On July 31, 2014, the Company completed the acquisitions of Beats Music, LLC, which offers a subscription streaming music service, and Beats Electronics,
LLC, which makes Beats Ⓡ headphones, speakers and audio software (collectively, “Beats”). The total purchase price consideration for these acquisitions was
$2.6 billion, which consisted primarily of cash, of which $2.2 billion was allocated to goodwill, $636 million to acquired intangible assets and $258 million to net
liabilities assumed. Concurrent with the close of the acquisitions, the Company repaid $295 million of existing Beats outstanding debt to third-party creditors. In
conjunction with the Beats acquisitions, the Company issued approximately 5.1 million shares of its common stock to certain former equity holders of Beats. The
restricted stock was valued at approximately $485 million based on the Company's common stock on the acquisition date. The majority of these shares, valued
at approximately $417 million, will vest over time based on continued employment with Apple.
The Company also completed various other business acquisitions during 2014 for an aggregate cash consideration, net of cash acquired, of $957 million, of
which $828 million was allocated to goodwill, $257 million to acquired intangible assets and $128 million to net liabilities assumed.
The Company'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 intangible asset balances as of September 26, 2015 and September 27, 2014
(in millions):
2015
2014
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
(324)
2015
(431)
(136)
$
24,062 $
20,259
9,365
4,567
$
33,427 $
24,826
2015
2014
2013
$
2,921
(733)
1,795 $
(384)
1,616
(903)
250
$
Fair Value
242
(985)
116,165
3
11,948
104,214
Municipal securities
947
5
0
952
0
48
904
Mortgage- and asset-backed securities
116,908
16,121
Corporate securities
1,035
43
135
6,056
Certificates of deposit and time deposits
4,347
0
0
4,347
2,065
1,405
877
Commercial paper
6,016
6,016
4,981
0
6,234
87
16,177
21,120
$
20,481 $
164,065
Apple Inc. | 2015 Form 10-K | 49
Table of Contents
Cash
Level 1:
Money market funds
Mutual funds
Subtotal
Level 2:
2014
Cash and
Short-Term
$
(31)
205,666
574 $
0
17
16,160
Subtotal
191,461
574
(1,184)
190,851
7,933
18,853
164,065
Total
$
206,420
$
(1,328) $
Long-Term
(167)
6,356
Value
Cash and
Cash
Equivalents
Short-Term
Marketable
Long-Term
Marketable
Securities
Securities
$
11,389
$
0
$
$
11,389
$
Losses
11,389
Fair
Unrealized
Gains
The Company's valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted
prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of the Company's debt instruments and all other
financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using
significant inputs derived from or corroborated by observable market data.
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value.
The Company has not elected the fair value option for any eligible financial instruments.
Foreign Currency Translation and Remeasurement
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end
of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses
from these translations are recognized in foreign currency translation included in AOCI in shareholders' equity. The Company's subsidiaries that use the U.S.
dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and
nonmonetary assets and liabilities at historical rates.
Note 2 - Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Company's cash and available-for-sale securities' adjusted cost, gross unrealized gains, gross unrealized losses and fair value by
significant investment category recorded as cash and cash equivalents or short- or long-term marketable securities as of September 26, 2015 and
September 27, 2014 (in millions):
Cash
Level 1:
Money market funds
Mutual funds
Subtotal
Level 2:
2015
Adjusted
Cost
Unrealized
45
$
$
34,902
181
35,082
0
3,498
31,584
U.S. agency securities
5,864
14
0
5,878
841
767
4,270
Non-U.S. government securities
U.S. Treasury securities
0
000
1,798
0
1,798
0
0
1,798
1,798
0
1,772
(144)
1,628
0
3,570
0
(144)
3,426
1,628
1,628
$ 1,442
$ 394
Adjusted
Unrealized
12,907
26
(49)
12,884
0
25
12,859
Subtotal
141,023
417
(379)
Total
$ 155,332 $
418 $
(511) $
Mortgage- and asset-backed securities
141,061
155,239 $
948
0
309
0
Corporate securities
85,431
296
(241)
85,486
6
6,298
79,182
Municipal securities
940
8
0
948
0
166
2,066
130,162
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 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 September 26, 2015 and
September 27, 2014 (in millions):
Derivative assets (1):
Foreign exchange contracts
Interest rate contracts
Derivative liabilities (2):
Foreign exchange contracts
Interest rate contracts
Apple Inc. | 2015 Form 10-K | 51
2015
Fair Value of
Derivatives Designated
as Hedge Instruments
Fair Value of
Derivatives Not Designated
as Hedge Instruments
Total
Fair Value Hedges
8,833
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.
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.
13,844 $
11,233 $
130,162
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.
As of September 26, 2015, the Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature and
does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy
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.
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.
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.
Apple Inc. | 2015 Form 10-K | 50
Table of Contents
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 September 26, 2015 are expected to be recognized within 10 years.
Cash Flow Hedges
The effective portions of cash flow hedges are recorded in 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.
Net Investment Hedges
Unrealized
475
1,369
0
$
0
1,546
0
0
1,546
1,546
0
0
2,531
(132)
2,400
2,400
0
$
4,077
10,232
0 $
Fair
Cost
Gains
Losses
Value
Cash
Equivalents
Marketable
Marketable
Securities
Securities
$
10,232
$
0
$
10,232 $
0
1
3,946
22,527
(11)
7,365
652
157
6,556
(69)
6,925
0
204
6,721
0
3,832
1,230
1,233
607
(132)
12
(9)
1,546
2,400
U.S. Treasury securities
23,140
15
U.S. agency securities
7,373
Non-U.S. government securities
6,925
69
Certificates of deposit and time deposits
3,832
Commercial paper
475
53000
23,146
2017
First quarter
To manage interest rate risk on the U.S. dollar-denominated fixed-rate notes issued in the second quarter of 2015 and maturing in 2020 and 2022, the Company
entered into interest rate swaps with an aggregate notional amount of $2.5 billion. To manage interest rate risk on the U.S. dollar-denominated fixed-rate notes
issued in the third quarter of 2015 and maturing in 2017, 2020, 2022 and 2025, the Company entered into interest rate swaps with an aggregate notional amount
of $4.3 billion. These interest rate swaps effectively converted the fixed interest rates on the U.S. dollar-denominated notes to a floating interest rate.
Net sales
Operating income
Greater China:
Net sales
Operating income
Japan:
Net sales
Operating income
Rest of Asia Pacific:
Net sales
Operating income
2015
2014
$ 93,864
$ 31,186
$ 80,095
$ 26,158
Europe:
Operating income
Net sales
Americas:
Other Commitments
The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company's products and to perform final assembly and testing of
finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically
covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with
industry practice, the Company acquires components through a combination of purchase orders, supplier contracts and open orders based on projected demand
information. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. As of
September 26, 2015, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $29.5
billion.
Apple Inc. | 2015 Form 10-K | 65
Table of Contents
In addition to the commitments mentioned above, the Company had other off-balance sheet obligations of $7.3 billion as of September 26, 2015 that consisted of
commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to inventory prepayments,
advertising, licensing, R&D, internet and telecommunications services, energy and other obligations.
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated,
certain of which are discussed in Part I, Item 1A of this Form 10-K under the heading "Risk Factors" and in Part I, Item 3 of this Form 10-K under the heading
"Legal Proceedings." 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.
2013
Apple Inc. v. Samsung Electronics Co., Ltd, et al.
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 each reportable operating segment provides
similar hardware and software products and similar services, they are 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."
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
R&D, 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.
Apple Inc. | 2015 Form 10-K | 66
Table of Contents
The following table shows information by reportable operating segment for 2015, 2014 and 2013 (in millions):
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. Because the ruling
remains subject to further proceedings, the Company has not recognized the award in its results of operations.
$ 6,271
$ 77,093
$ 50,337 $ 44,285
2013
Segment operating income
$
Research and development expense
Other corporate expenses, net
Total operating income
83,850 $
(8,067)
62,209 $
(6,041)
56,525
(4,475)
(4,553)
(3,665)
(3,051)
$
71,230 $ 52,503 $
2014
2015
A reconciliation of the Company's segment operating income to the Consolidated Statements of Operations for 2015, 2014 and 2013 is as follows (in millions):
$ 5,518 $ 3,674 $ 3,762
$ 40,980
$ 16,527
$ 14,434
$ 12,767
$ 58,715
$ 31,853 $ 27,016
$ 23,002
$ 24,829
$ 11,039 $ 8,499
$ 15,314
$ 13,782
$ 7,617
$ 6,904
$ 6,668
$ 15,093 $ 11,248
$ 12,039
$ 15,706
48,999
2,592
715
Research and development
Selling, general and administrative
Total share-based compensation expense
2015
2014
$
575 $ 450 $
1,536 1,216
1,197
2013
350
917
986
333
1,475
$ 3,586
$ 2,863
$ 2,253
The income tax benefit related to share-based compensation expense was $1.2 billion, $1.0 billion and $816 million for 2015, 2014 and 2013, respectively. As of
September 26, 2015, the total unrecognized compensation cost related to outstanding stock options, RSUs and restricted stock was $6.8 billion, which the
Company expects to recognize over a weighted-average period of 2.7 years.
Note 10 - Commitments and Contingencies
Cost of sales
The following table shows a summary of the share-based compensation expense included in the Consolidated Statements of Operations for 2015, 2014 and
2013 (in millions):
Share-based Compensation
Table of Contents
68.47
103,822 $
70.98
45,587 $
105.51
(41,684) $
71.32
Accrued Warranty and Indemnification
(6,258) $
101,467 $
85.77 $
11,639
The fair value as of the respective vesting dates of RSUs was $4.8 billion, $3.4 billion and $3.1 billion for 2015, 2014 and 2013, respectively. The majority of
RSUS that vested in 2015, 2014 and 2013 were net-share settled such that the Company withheld shares with value equivalent to the employees' minimum
statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld
were approximately 14.1 million, 15.6 million and 15.5 million for 2015, 2014 and 2013, respectively, and were based on the value of the RSUs on their
respective vesting dates as determined by the Company's closing stock price. Total payments for the employees' tax obligations to taxing authorities were $1.6
billion, $1.2 billion and $1.1 billion in 2015, 2014 and 2013, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash
Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been
issued as a result of the vesting and did not represent an expense to the Company.
Stock Options
The Company had 1.2 million stock options outstanding as of September 26, 2015, with a weighted-average exercise price per share of $15.08 and weighted-
average remaining contractual term of 4.1 years, substantially all of which are exercisable. The aggregate intrinsic value of the stock options outstanding as of
September 26, 2015 was $120 million, which represents the value of the Company's closing stock price on the last trading day of the period in excess of the
weighted-average exercise price multiplied by the number of options outstanding. Total intrinsic value of options at time of exercise was $479 million, $1.5 billion
and $1.0 billion for 2015, 2014 and 2013, respectively.
Apple Inc. | 2015 Form 10-K | 63
80.34
674
The following table shows changes in the Company's accrued warranties and related costs for 2015, 2014 and 2013 (in millions):
Cost of warranty claims
Substantially all of the Company's hardware products are manufactured by outsourcing partners that are located primarily in Asia. A significant concentration of
this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-
sourced suppliers of components and manufacturers for many of the Company's products. Although the Company works closely with its outsourcing partners on
manufacturing schedules, the Company's operating results could be adversely affected if its outsourcing partners were unable to meet their production
commitments. The Company's purchase commitments typically cover its requirements for periods up to 150 days.
Other Off-Balance Sheet Commitments
Operating Leases
The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not
currently utilize any other off-balance sheet financing arrangements. The major facility leases are typically for terms not exceeding 10 years and generally
contain multi-year renewal options. As of September 26, 2015, the Company had a total of 463 retail stores. Leases for retail space are for terms ranging from
five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options. As of September 26, 2015, the Company's total future
minimum lease payments under noncancelable operating leases were $6.3 billion, of which $3.6 billion related to leases for retail space.
Rent expense under all operating leases, including both cancelable and noncancelable leases, was $794 million, $717 million and $645 million in 2015, 2014
and 2013, respectively. Future minimum lease payments under noncancelable operating leases having remaining terms in excess of one year as of
September 26, 2015, are as follows (in millions):
2016
2017
2018
2019
2020
Thereafter
Total
$
772
774
744
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.
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.
Table of Contents
Apple Inc. | 2015 Form 10-K | 64
Accruals for product warranty
Ending accrued warranty and related costs
2015
2014
2013
$ 4,159 $ 2,967 $ 1,638
(4,401)
5,022
333
Beginning accrued warranty and related costs
$ 4,780
(3,703)
5,032
$ 4,159 $ 2,967
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 did not record a liability for infringement costs related to
indemnification as of September 26, 2015 or September 27, 2014.
In September 2015, the Company introduced the iPhone Upgrade Program, which is available to customers who purchase an iPhone 6s and 6s Plus in one of its
U.S. physical retail stores and activate the purchased iPhone with one of the four 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.
(3,760)
4,952
The U.S. and China were the only countries that accounted for more than 10% of the Company's net sales in 2015, 2014 and 2013. There was no single
customer that accounted for more than 10% of net sales in 2015, 2014 or 2013. Net sales for 2015, 2014 and 2013 and long-lived assets as of September 26,
2015 and September 27, 2014 are as follows (in millions):
Net sales:
U.S.
1.97 $
1.96
1.86
$
2.34
$
3.08
$
1.85
$
2.33
$
3.06
Fourth Quarter
Third Quarter
Second Quarter
$
$
67 67
74,599
29,741
18,024
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
ᏌᏊ ᏌᏊ
$
51,501 $
First Quarter
$
49,605 $
19,681 $
58,010 $
23,656 $
$
11,124 $
10,677 $
13,569 $
20,548 $
Gross margin
Ꮚ ᏌᏊ Ꮎ
42,123 $
1.43 $
1.42
$
1.29
1.28
$
1.67
$
2.08
$
1.66
EA.
$
2.07
(1)
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted
per share information may not equal annual basic and diluted earnings per share.
Apple Inc. | 2015 Form 10-K | 68
Table of Contents
$
$
6969
Diluted
$
16,009 $
$
8,467
$
37,432 $
14,735 $
7,748 $
45,646 $
$
57,594
21,846
10,223
$
13,072
Net income
Earnings per share (1):
Basic
17,947 $
Net sales
2014:
Diluted
$
12,022 $
9,108
8,722
9,477
Other countries
3,040
2,917
Total long-lived assets
$
23,784 $
21,502
(1) China includes Hong Kong. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets
related to retail stores and related infrastructure.
Apple Inc. | 2015 Form 10-K | 67
Table of Contents
China (1)
U.S.
Long-lived assets:
2014
China (1)
Other countries
Total net sales
2015
2014
2013
$
Net sales by product for 2015, 2014 and 2013 are as follows (in millions):
81,732 $
56,547
66,197
25,946
95,436
83,248
78,767
$ 233,715 $ 182,795 $ 170,910
2015
68,909 $
30,638
Net Sales by Product:
iPhone (1)
iPad (1)
$ 233,715 $ 182,795 $ 170,910
Total net sales
(1)
Includes deferrals and amortization of related software upgrade rights and non-software services.
(2)
Includes revenue from the iTunes Store, App Store, Mac App Store, iBooks Store, Apple Music, AppleCare, Apple Pay, licensing and other services.
(3)
10,117
Includes sales of Apple TV, Apple Watch, Beats products, iPod and Apple-branded and third-party accessories.
The following tables show a summary of the Company's quarterly financial information for each of the four quarters of 2015 and 2014 (in millions, except per
share amounts):
2015:
Net sales
Gross margin
Net income
Earnings per share (1):
Basic
Note 12 - Selected Quarterly Financial Information (Unaudited)
(5,620) $
8,379
16,051
Mac (1)
Services (2)
Other Products (1)(3)
2015
2014
2013
$ 155,041 $ 101,991 $
10,067
91,279
30,283
31,980
25,471
24,079
21,483
19,909
18,063
23,227
57.29
Total cash dividends declared and paid
74.54
Number of Shares
(in thousands)
Average Repurchase
Amount
Price Per Share
(in millions)
121,802
31,231
56,400
2014:
45,704
$
115.15
$
14,026
$
128.08
4,000
$
EA SA SA SA
124.11
Total open market common stock repurchases
Second quarter
110.40
$
9,000
$
89.39
$
12,000
$
First quarter
69.55
12,000
(1) Includes 38.3 million shares delivered and retired at the beginning of the purchase period, which began in the third quarter of 2015 and 10.0 million
shares delivered and retired at the end of the purchase period, which concluded in the fourth quarter of 2015.
(2)
Includes 59.9 million shares delivered and retired at the beginning of the purchase period, which began in the fourth quarter of 2014, 8.3 million net
shares delivered and retired in the first quarter of 2015 and 13.3 million shares delivered and retired at the end of the purchase period, which concluded
in the second quarter of 2015.
Additionally, the Company repurchased shares of its common stock in the open market, which were retired upon repurchase, during the periods presented as
follows:
2015:
Fourth quarter
Third quarter
$
$
7,000
109.40
5,000
Total open market common stock repurchases
286,512
$
24,000
Apple Inc. | 2015 Form 10-K | 60
Table of Contents
Note 8 - Comprehensive Income
74.79
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.
Comprehensive Income Components
Unrealized (gains)/losses on derivative instruments:
Foreign exchange contracts
Financial Statement Line Item
2015
2014
Revenue
$
Cost of sales
The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement
line item, for 2015 and 2014 (in millions):
$
$
75.24
5,000
255,137
$
30,026
Fourth quarter
81,255 $
Third quarter
58,661 $
6,000
Second quarter
First quarter
66,847
SASASSA
98.46 $
8,000
85.23
5,000
$
79,749
(2,432)
(2,168)
81,525 (2)
134,247
172,548
$
Fourth quarter
Third quarter
Second quarter
First quarter
2014:
Fourth quarter
Third quarter
Second quarter
2015:
Total cash dividends declared and paid
Apple Inc. | 2015 Form 10-K | 59
Dividends
Amount
Per Share
(in millions)
$
0.52
$
Future dividends are subject to declaration by the Board of Directors.
2,950
The Company declared and paid cash dividends per share during the periods presented as follows:
As of September 26, 2015 and September 27, 2014, the fair value of the Company's Notes, based on Level 2 inputs, was $54.9 billion and $28.5 billion,
respectively.
As of September 26, 2015, ¥250.0 billion of the 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 September 26, 2015, the carrying value of the debt designated as a net investment hedge was $2.1
billion.
(43,111) $
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 $722 million, $381 million and $136 million of interest expense on its term debt for 2015, 2014 and 2013, respectively.
The future principal payments for the Company's Notes as of September 26, 2015 are as follows (in millions):
2016
2017
2018
2019
Note 7 - Shareholders' Equity
Dividends
2020
Total term debt
$ 2,500
3,500
6,000
3,775
5,581
34,345
$ 55,701
Thereafter
6,000
0.52
0.47
Average
May 2015 ASR
August 2014 ASR
January 2014 ASR
April 2013 ASR
Purchase
Period End
Date
July 2015
The following table shows the Company's ASR activity and related information during the years ended September 26, 2015 and September 27, 2014:
February 2015
December 2014
Number of
Shares
(in thousands)
Repurchase
Price Per
Share
ASR
Amount
(in millions)
48,293 (1)
$
124.24
March 2014
2,997
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 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.
Share Repurchase Program
2,734
0.47
2,750
$
1.98 $
11,431
$
EA
In the third quarter of 2015, the Company's Board of Directors increased the share repurchase authorization to $140 billion of the Company's common stock, of
which $104 billion had been utilized as of September 26, 2015. The Company's share repurchase program does not obligate it to acquire any specific number of
shares. Under the program, shares may be repurchased in privately negotiated 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").
2,807
2,830
0.44
2,655
0.44
2,739
$ 1.82 $
11,031
Table of Contents
0.47
$
0.47 $
622
(1,427)
(137)
1,539
151
1,553
(242)
1,364
(40)
1,082
(612)
3,346
(747)
1,987
0
(4,127)
91
(4,036)
201
189
232
(411
(592)
(424)
$
(365)
(653)
(82)
50
Balance at September 26, 2015
Unrealized
Gains/Losses
Translation
on Derivative
Instruments
on Marketable
Securities
Total
$
(105)
$
(187)
(175)
1,687
$
(191)
$
(471)
438
1,938
0
185
(205)
(20)
(333)
$
772
$
RSUS vested
RSUS cancelled
Balance at September 27, 2014
RSUs granted
RSUS vested
RSUS cancelled
Balance at September 26, 2015
Number of
RSUs
(in thousands)
Weighted-Average
Grant Date Fair
Value Per Share
Aggregate
Intrinsic Value
(in millions)
105,037 $
49.27
39,415 $
78.23
(42,291) $
45.96
(8,877) $
57.31
93,284
EA
$
62.24
RSUs granted
Balance at September 28, 2013
RSUS cancelled
RSUS vested
(464)
$
(345)
Apple Inc. | 2015 Form 10-K | 61
Table of Contents
Note 9 - Benefit Plans
2014 Employee Stock Plan
In the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the "2014 Plan”) and terminated the Company's authority to grant new
awards under the 2003 Employee Stock Plan (the "2003 Plan"). The 2014 Plan provides for broad-based equity grants to employees, including executive
officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards.
RSUS granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company's
common stock on a one-for-one basis. Each share issued with respect to RSUs granted under the 2014 Plan reduces the number of shares available for grant
under the plan by two shares. RSUs cancelled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under
the 2014 Plan utilizing a factor of two times the number of RSUs cancelled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend
equivalent rights ("DERS"), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same
vesting and other terms and conditions as the corresponding unvested RSUs. DERS are accumulated and paid when the underlying shares vest. Upon approval
of the 2014 Plan, the Company reserved 385 million shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares
subject to outstanding awards under the 2003 Plan that expire, are cancelled or otherwise terminate, or are withheld to satisfy tax withholding obligations with
respect to RSUs, will also be available for awards under the 2014 Plan. As of September 26, 2015, approximately 442.9 million shares were reserved for future
issuance under the 2014 Plan.
2003 Employee Stock Plan
The 2003 Plan is a shareholder approved plan that provided for broad-based equity grants to employees, including executive officers. The 2003 Plan permitted
the granting of incentive stock options, nonstatutory stock options, RSUs, stock appreciation rights, stock purchase rights and performance-based awards.
Options granted under the 2003 Plan generally expire seven to ten years after the grant date and generally become exercisable over a period of four years,
based on continued employment, with either annual, semi-annual or quarterly vesting. RSUs granted under the 2003 Plan generally vest over two to four years,
based on continued employment and are settled upon vesting in shares of the Company's common stock on a one-for-one basis. All RSUs, other than RSUs
held by the Chief Executive Officer, granted under the 2003 Plan have DERS. DERS are subject to the same vesting and other terms and conditions as the
corresponding unvested RSUs. DERS are accumulated and paid when the underlying shares vest. In the second quarter of 2014, the Company terminated the
authority to grant new awards under the 2003 Plan.
1997 Director Stock Plan
Other comprehensive income/(loss)
The 1997 Director Stock Plan (the “Director Plan”) is a shareholder approved plan that (i) permits the Company to grant awards of RSUs or stock options to the
Company's non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic
annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the relative mixture of stock
options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company's common stock subject to
these grants without shareholder approval. Each share issued with respect to RSUs granted under the Director Plan reduces the number of shares available for
grant under the plan by two shares. The Director Plan expires November 9, 2019. All RSUs granted under the Director Plan are entitled to DERS. DERS are
subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERS are accumulated and paid when the underlying shares
vest. As of September 26, 2015, approximately 1.2 million shares were reserved for future issuance under the Director Plan.
During the fourth quarter of 2015, 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.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the "Purchase Plan") is a shareholder approved plan under which substantially all employees may purchase the Company's
common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month
offering periods. An employee's payroll deductions under the Purchase Plan are limited to 10% of the employee's compensation and employees may not
purchase more than $25,000 of stock during any calendar year. As of September 26, 2015, approximately 53.0 million shares were reserved for future issuance
under the Purchase Plan.
Apple Inc. | 2015 Form 10-K | 62
Table of Contents
401(k) Plan
The Company's 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S.
employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($18,000 for calendar year 2015). The Company matches 50% to
100% of each employee's contributions, depending on length of service, up to a maximum 6% of the employee's eligible earnings. The Company's matching
contributions to the 401(k) Plan were $200 million, $163 million and $135 million in 2015, 2014 and 2013, respectively.
Restricted Stock Units
A summary of the Company's RSU activity and related information for 2015, 2014 and 2013, is as follows:
Balance at September 29, 2012
RSUs granted
Rule 10b5-1 Trading Plans
Tax effect
Unrealized
Gains/Losses
Balance at September 27, 2014
59,269 $
Other comprehensive income/(loss) before reclassifications
Amounts reclassified from AOCI
Other income/(expense), net
456
Other income/(expense), net
17
16
Other income/(expense), net
(4,127)
91
185
(205)
$
449
(295)
15
(20)
Other comprehensive income/(loss)
(4,036) $
Other comprehensive income/(loss) before reclassifications
Balance at September 28, 2013
Amounts reclassified from AOCI
The following table shows the changes in AOCI by component for 2015 (in millions):
Total amounts reclassified from AOCI
Unrealized (gains)/losses on marketable securities
Interest rate contracts
Cumulative
Foreign
Currency
Tax effect
8-K
10.3*
10.1
3/13/15
10.2*
Form of Indemnification Agreement between the Registrant and each director and executive officer of the
Registrant.
10-Q 10.2
6/27/09
2003 Employee Stock Plan, as amended through February 25, 2010.
10-Q
10-Q 10.14
10.4*
8-K
10.5*
Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of November 16,
2010.
10.3
10.1
10-Q 10.10
12/28/13
3/1/10
12/25/10
Employee Stock Purchase Plan, as amended and restated as of March 10, 2015.
1997 Director Stock Plan, as amended through August 23, 2012.
10.1*
4.1
4.1
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
23.1**
Subsidiaries of the Registrant.
4.1
21.1**
12/27/14
5/13/15
4.8
Officer's Certificate of the Registrant, dated as of June 10, 2015, including forms of global notes representing the
0.35% Notes due 2020.
9/17/15
8-K
6/10/15
4.9
Officer's Certificate of the Registrant, dated as of July 31, 2015, including forms of global notes representing the
3.05% Notes due 2029 and 3.60% Notes due 2042.
8-K
4.1
7/31/15
4.10
Officer's Certificate of the Registrant, dated as of September 17, 2015, including forms of global notes representing
the 1.375% Notes due 2024 and 2.000% Notes due 2027.
8-K
10.6*
Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of April 6, 2012.
Apple Inc. | 2015 Form 10-K | 75
End
Date
10.8
8-K
10.2
3/5/14
8-K
10.3
3/5/14
10-K
10.11
9/27/14
10.12*
10.13*
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 26, 2014.
Form of Amendment, effective as of August 26, 2014, to Restricted Stock Unit Award Agreements and
Performance Award Agreements outstanding as of August 26, 2014.
10-K 10.12
9/27/14
10-K
10.13
9/27/14
10.14*
24.1**
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan as of February 28, 2014.
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of February 28, 2014.
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of August 26,
2014.
10.11*
10.10*
10.9*
3/31/12
Table of Contents
Incorporated by
Reference
Filing Date/
Period
Exhibit
Number
Exhibit Description
10.7*
Form
10-Q
Exhibit
Summary Description of Amendment, effective as of May 24, 2012, to certain Restricted Stock Unit Award
Agreements outstanding as of April 5, 2012.
10-Q 10.8
6/30/12
10.8*
12.1**
2014 Employee Stock Plan.
8-K
10.1
3/5/14
Offer Letter, dated August 1, 2013, from the Registrant to Angela Ahrendts.
Computation of Ratio of Earnings to Fixed Charges.
Power of Attorney (included on the Signatures page of this
Annual Report on Form 10-K).
Changes in Internal Control Over Financial Reporting
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer.
892
$
68
98
129
143
159
0
$
GA
0
$
136
$
384
$
733
$
EA
$
527 $
265
$
Ireland
Ireland
Braeburn Capital, Inc.
Apple Sales International
Apple Operations International
Apple Operations Europe
Jurisdiction
of Incorporation
Exhibit 21.1
Subsidiaries of
Apple Inc.*
The ratio of earnings to fixed charges is computed by dividing Total Earnings by Total Fixed Charges.
(2)
34,273
Fixed charges include the portion of rental expense that management believes is representative of the interest component.
504
570
190
102
82
Ratio of Earnings to Fixed Charges (2)
68
$
98
(1)
$
55,861
34,205
68
Earnings:
Exhibit 12.1
(In millions, except ratios)
Computation of Ratio of Earnings to Fixed Charges
Apple Inc.
Apple Inc. | 2015 Form 10-K | 76
Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation
S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
Furnished herewith.
Filed herewith.
Earnings before provision for income taxes
Indicates management contract or compensatory plan or arrangement.
8-K
***
**
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB** XBRL Taxonomy Extension Label Linkbase Document.
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF**
XBRL Taxonomy Extension Calculation Linkbase Document.
101.CAL**
XBRL Taxonomy Extension Schema Document.
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
XBRL Instance Document.
(1)
31.1**
31.2**
32.1***
101.INS**
101.SCH**
Add: Fixed Charges
Fixed Charges (1):
$
55,763
98
$
50,155
265
50,420 $
$
53,483
527
54,010 $
73,407 $
$
892
Total Earnings
$
$
September 24,
2011
September 29,
2012
Years ended
September 28,
2013
September 27,
2014
September 26,
2015
Total Fixed Charges
Interest component of rental expense
Interest Expense
72,515
Officer's Certificate of the Registrant, dated as of May 13, 2015, including forms of global notes representing the
Floating Rate Notes due 2017, Floating Rate Notes due 2020, 0.900% Notes due 2017, 2.000% Notes due 2020,
2.700% Notes due 2022, 3.200% Notes due 2025, and 4.375% Notes due 2045.
/s/ Andrea Jung
2/9/15
In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 26, 2015, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial
statements of Apple Inc. and our report dated October 28, 2015 expressed an unqualified opinion thereon.
San Jose, California
October 28, 2015
/s/ Ernst & Young LLP
Apple Inc. | 2015 Form 10-K | 70
Table of Contents
Item 9.
None.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company's management, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") were effective as of September 26, 2015 to provide reasonable assurance that information required to
be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Inherent Limitations Over Internal Controls
The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company's internal
control over financial reporting includes those policies and procedures that:
(i)
(ii)
(iii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's
assets;
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
We have audited Apple Inc.'s internal control over financial reporting as of September 26, 2015, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) ("the COSO criteria"). Apple Inc.'s
management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.
Table of Contents
Apple Inc. | 2015 Form 10-K | 73
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
(3) Exhibits required by Item 601 of Regulation S-K
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.
(2) Financial Statement Schedules
69
Ireland
The Board of Directors and Shareholders of Apple Inc.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP,
and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and
directors; and
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 26, 2015 and September 27, 2014, and the related consolidated
statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended September 26, 2015.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Apple Inc. at September 26,
2015 and September 27, 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 26,
2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Apple Inc.'s internal control over
financial reporting as of September 26, 2015, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated October 28, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
October 28, 2015
Apple Inc. | 2015 Form 10-K | 69
Table of Contents
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Apple Inc.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
SIGNATURES
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the financial statements.
Management's Annual Report on Internal Control Over Financial Reporting
Certain Relationships and Related Transactions, and Director Independence
Item 13.
The information required by this Item is set forth under the headings “Security Ownership of Certain Beneficial Owners and Management" and "Equity
Compensation Plan Information" in the Company's 2016 Proxy Statement to be filed with the SEC within 120 days after September 26, 2015 and is incorporated
herein by reference.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12.
The information required by this Item is set forth under the heading "Executive Compensation" and under the subheadings “Board Oversight of Risk
Management," "Compensation Committee Interlocks and Insider Participation," "Compensation of Directors” and “Director Compensation-2015” under the
heading "Directors, Corporate Governance and Executive Officers" in the Company's 2016 Proxy Statement to be filed with the SEC within 120 days after
September 26, 2015 and is incorporated herein by reference.
Executive Compensation
Item 11.
The Company has a code of ethics, "Business Conduct: The way we do business worldwide," that applies to all employees, including the Company's principal
executive officer, principal financial officer, and principal accounting officer, as well as to the members of the Board of Directors of the Company. The code is
available at investor.apple.com/corporate-governance.cfm. The Company intends to disclose any changes in, or waivers from, this code by posting such
information on the same website or by filing a Form 8-K, in each case to the extent such disclosure is required by rules of the SEC or the NASDAQ Stock Market
LLC.
The information required by this Item is set forth under the headings “Directors, Corporate Governance and Executive Officers" in the Company's 2016 Proxy
Statement to be filed with the U.S. Securities and Exchange Commission (the “SEC”) within 120 days after September 26, 2015 in connection with the
solicitation of proxies for the Company's 2016 annual meeting of shareholders and is incorporated herein by reference.
Directors, Executive Officers and Corporate Governance
Item 10.
PART III
Table of Contents
Apple Inc. | 2015 Form 10-K | 71
Other Information
Not applicable.
Item 9B.
There were no changes in the Company's internal control over financial reporting during the fourth quarter of 2015, which were identified in connection with
management's evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
The information required by this Item is set forth under the subheadings "Board Committees", "Review, Approval or Ratification of Transactions with Related
Persons" and "Transactions with Related Persons" under the heading "Directors, Corporate Governance and Executive Officers" in the Company's 2016 Proxy
Statement to be filed with the SEC within 120 days after September 26, 2015 and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services
The information required by this Item is set forth under the subheadings "Fees Paid to Auditors" and "Policy on Audit Committee Pre-Approval of Audit and Non-
Audit Services Performed by the Independent Registered Public Accounting Firm" under the proposal "Ratification of Appointment of Independent Registered
Public Accounting Firm" in the Company's 2016 Proxy Statement to be filed with the SEC within 120 days after September 26, 2015 and is incorporated herein
by reference.
68
44
43
42
41
40
39
Page
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
Management, including the Company's Chief Executive Officer and Chief Financial Officer, does not expect that the Company's internal controls will prevent or
detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide
absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future
periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Selected Quarterly Financial Information (Unaudited)
Consolidated Statements of Operations for the years ended September 26, 2015, September 27, 2014 and September 28, 2013
Consolidated Statements of Comprehensive Income for the years ended September 26, 2015, September 27, 2014 and September 28, 2013
Consolidated Balance Sheets as of September 26, 2015 and September 27, 2014
Index to Consolidated Financial Statements
(1) All financial statements
(a) Documents filed as part of this report
Exhibits, Financial Statement Schedules
Item 15.
PART IV
Table of Contents
Apple Inc. | 2015 Form 10-K | 72
Consolidated Statements of Shareholders' Equity for the years ended September 26, 2015, September 27, 2014 and September 28, 2013
Consolidated Statements of Cash Flows for the years ended September 26, 2015, September 27, 2014 and September 28, 2013
Notes to Consolidated Financial Statements
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: October 28, 2015
Apple Inc.
12/30/06
10-Q 4.1
Form of Common Stock Certificate of the Registrant.
4.1
3/5/14
3.2
8-K
Amended and Restated Bylaws of the Registrant effective as of
February 28, 2014.
3.2
6/6/14
3.1
8-K
Exhibit Date
Form
End
Filing Date/
Period
Reference
Incorporated by
Restated Articles of Incorporation of the Registrant effective as of
June 6, 2014.
4.2
Indenture, dated as of April 29, 2013, between the Registrant and The Bank of New York Mellon Trust Company,
N.A., as Trustee.
S-3
4.1
4.1
8-K
Officer's Certificate of the Registrant, dated as of February 9, 2015, including forms of global notes representing
the Floating Rate Notes due 2020, 1.55% Notes due 2020, 2.15% Notes due 2022, 2.50% Notes due 2025 and
3.45% Notes due 2045.
4.6
11/10/14
4.1
8-K
Officer's Certificate of the Registrant, dated as of November 10, 2014, including forms of global notes representing
the 1.000% Notes due 2022 and 1.625% Notes due 2026.
4.5
EXHIBIT INDEX (1)
5/6/14
8-K
Officer's Certificate of the Registrant, dated as of May 6, 2014, including forms of global notes representing the
Floating Rate Notes due 2017, Floating Rate Notes due 2019, 1.05% Notes due 2017, 2.10% Notes due 2019,
2.85% Notes due 2021, 3.45% Notes due 2024 and 4.45% Notes due 2044.
4.4
5/3/13
4.1
8-K
Officer's Certificate of the Registrant, dated as of May 3, 2013, including forms of global notes representing the
Floating Rate Notes due 2016, Floating Rate Notes due 2018, 0.45% Notes due 2016, 1.00% Notes due 2018,
2.40% Notes due 2023 and 3.85% Notes due 2043.
4.3
4/29/13
4.1
3.1
Exhibit Description
Exhibit
Number
October 28, 2015
October 28, 2015
Director
Senior Director of Corporate Accounting
(Principal Accounting Officer)
October 28, 2015
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
Chief Executive Officer and Director
(Principal Executive Officer)
Title
October 28, 2015
/s/ Al Gore
Date
/s/ Chris Kondo
/s/ Luca Maestri
LUCA MAESTRI
/s/ Timothy D. Cook
TIMOTHY D. COOK
Name
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy D. Cook and Luca Maestri,
jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Power of Attorney
Luca Maestri
Senior Vice President,
Chief Financial Officer
By: /s/ Luca Maestri
CHRIS KONDO
4.7
AL GORE
Director
Table of Contents
October 28, 2015
October 28, 2015
October 28, 2015
October 28, 2015
October 28, 2015
Apple Inc. | 2015 Form 10-K | 74
SUSAN L. WAGNER
Director
/s/ Robert A. Iger
/s/ Susan L. Wagner
Director
/s/ Ronald D. Sugar
ARTHUR D. LEVINSON
Director
/s/ Arthur D. Levinson
ANDREA JUNG
Director
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the
criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework). Based on the Company's assessment, management has concluded that its internal control over financial reporting was effective as of
September 26, 2015 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance
with GAAP. The Company's independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company's internal control
over financial reporting, which appears in Part II, Item 8 of this Form 10-K.
ROBERT A. IGER
RONALD D. SUGAR
Nevada, U.S.
Table of Contents
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Apple Inc. are omitted because, considered in the aggregate, they
would not constitute a significant subsidiary as of the end of the year covered by this report.
AS ADOPTED PURSUANT TO
Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(d)
(c)
(a)
The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
5.
Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting; and
4.
3.
2.
I have reviewed this annual report on Form 10-K of Apple Inc.;
1.
Exhibit 31.2
CERTIFICATION
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record, process, summarize, and report financial information; and
(b)
A signed original of this written statement required by Section 906 has been provided to Apple Inc. and will be retained by Apple Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
Luca Maestri
Senior Vice President,
Chief Financial Officer
By: /s/ Luca Maestri
Date: October 28, 2015
I, Luca Maestri, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Annual Report of Apple Inc. on Form 10-K for the fiscal year ended September 26, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of
operations of Apple Inc. at the dates and for the periods indicated.
By: /s/ Timothy D. Cook
Timothy D. Cook
Chief Executive Officer
Date: October 28, 2015
I, Timothy D. Cook, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Annual Report of Apple Inc. on Form 10-K for the fiscal year ended September 26, 2015 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results
of operations of Apple Inc. at the dates and for the periods indicated.
Exhibit 32.1
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
18 U.S.C. SECTION 1350,
PURSUANT TO
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
Luca Maestri
Senior Vice President,
Chief Financial Officer
By: /s/ Luca Maestri
Date: October 28, 2015
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over
financial reporting.
I, Luca Maestri, certify that:
By: /s/ Timothy D. Cook
Timothy D. Cook
Chief Executive Officer
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over
financial reporting.
I, Timothy D. Cook, certify that:
/s/ Ernst & Young LLP
San Jose, California
October 28, 2015
of our reports dated October 28, 2015 with respect to the consolidated financial statements of Apple Inc., and the effectiveness of internal control over financial
reporting of Apple Inc., included in this Annual Report on Form 10-K for the year ended September 26, 2015.
(12) Registration Statement (Form S-8 No. 333-60455) pertaining to 1997 Director Stock Option Plan;
(11) Registration Statement (Form S-8 No. 333-125148) pertaining to Employee Stock Purchase Plan and 2003 Employee Stock Plan, and
(10) Registration Statement (Form S-8 No. 333-146026) pertaining to Apple Inc. 2003 Employee Stock Plan and Apple Inc. Amended Employee Stock Purchase
Plan,
(9) Registration Statement (Form S-8 No. 333-165214) pertaining to Apple Inc. 2003 Employee Stock Plan, la la media, inc. 2005 Stock Plan and Quattro
Wireless, Inc. 2006 Stock Option and Grant Plan,
CERTIFICATION
(8) Registration Statement (Form S-8 No. 333-168279) pertaining to Siri, Inc. 2008 Stock Option/Stock Issuance Plan,
Date: October 28, 2015
(5) Registration Statement (Form S-8 No. 333-184706) pertaining to AuthenTec, Inc. 2007 Stock Incentive Plan and AuthenTec, Inc. 2010 Incentive Plan, as
amended,
(4) Registration Statement (Form S-3 ASR No. 333-188191) of Apple Inc.,
(3) Registration Statement (Form S-8 No. 333-193709) pertaining to Topsy Labs, Inc. 2007 Stock Plan,
(1) Registration Statement (Form S-8 No. 333-203698) pertaining to Apple Inc. Employee Stock Purchase Plan,
(2) Registration Statement (Form S-8 No. 333-195509) pertaining to Apple Inc. 2014 Employee Stock Plan,
We consent to the incorporation by reference in the following Registration Statements:
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
Exhibit 23.1
(7) Registration Statement (Form S-8 No. 333-179189) pertaining to Anobit Technologies Ltd. Global Share Incentive Plan (2006),
Exhibit 31.1
(6) Registration Statement (Form S-8 No. 333-180981) pertaining to Chomp Inc. 2009 Equity Incentive Plan,
I have reviewed this annual report on Form 10-K of Apple Inc.;
(b)
1.
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record, process, summarize, and report financial information; and
The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting; and
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(d)
(c)
(b)
Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
5.
4.
(a)
3.
Part I
Page
1
8
16
17
17
Part II
Item 5.
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.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Item 6.
Item 7.
Item 7A.
17
For the Fiscal Year Ended September 30, 2017
Unresolved Staff Comments
Apple Inc.
Mine Safety Disclosures
Item 4.
Legal Proceedings
Item 3.
Properties
Item 2.
Item 1B.
Risk Factors
Item 1A.
Business
Item 1.
18
Form 10-K
21
Apple Inc. | 2017 Form 10-K | 5
22
Portions of the Registrant's definitive proxy statement relating to its 2018 annual meeting of shareholders (the " 2018 Proxy Statement") are incorporated by reference into Part
Ill of this Annual Report on Form 10-K where indicated. The 2018 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the
end of the fiscal year to which this report relates.
Form 10-K Summary
Item 16.
Exhibits, Financial Statement Schedules
Item 15.
33333
73
73
73
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 13.
Item 12.
Executive Compensation
Item 11.
73
Directors, Executive Officers and Corporate Governance
Item 10.
73
Part III
72
Other Information
72
72
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Item 9.
Item 9A.
Item 9B.
38
Financial Statements and Supplementary Data
Item 8.
36
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
DOCUMENTS INCORPORATED BY REFERENCE
(I.R.S. Employer Identification No.)
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of March 31, 2017, the last business day of the Registrant's most
recently completed second fiscal quarter, was approximately $747,509,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and
directors of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as
affiliates is not necessarily a conclusive determination for any other purposes.
0.875% Notes due 2025
1.375% Notes due 2024
1.000% Notes due 2022
The Nasdaq Stock Market LLC
New York Stock Exchange LLC
Common Stock, $0.00001 par value per share
Securities registered pursuant to Section 12(b) of the Act:
95014
(Zip Code)
Part IV
94-2404110
(Registrant's telephone number, including area code)
(408) 996-1010
(Address of principal executive offices)
Cupertino, California
1.625% Notes due 2026
1 Infinite Loop
(State or other jurisdiction
California
(Exact name of Registrant as specified in its charter)
Apple Inc.
Commission File Number: 001-36743
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
or
☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017
FORM 10-K
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
UNITED STATES
(Mark One)
of incorporation or organization)
2.000% Notes due 2027
1.375% Notes due 2029
3.050% Notes due 2029
Yes ☐ No ☑
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
ㅁㅁㅁ
Emerging growth company
Smaller reporting company
Accelerated filer
☐ (Do not check if a smaller reporting company)
☑
Large accelerated filer
Non-accelerated filer
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. ☐
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 (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 if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☑ No ☐
Securities registered pursuant to Section 12(g) of the Act: None
New York Stock Exchange LLC
(Name of each exchange on which registered)
(Title of each class)
3.600% Notes due 2042
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
5,134,312,000 shares of common stock were issued and outstanding as of October 20, 2017.
76
TABLE OF CONTENTS
74
The Company's application software includes iWork Ⓡ and various other software, including Final Cut Pro ®, Logic Pro ® X and FileMaker ® Pro. iWork is the
Company's integrated productivity suite included with all Mac computers and is designed to help users create, present and publish documents through Pages Ⓡ
presentations through Keynote Ⓡ and spreadsheets through Numbers ® . The Company also has Multi-Touch ™ versions of iWork applications designed
specifically for use on iOS devices, which are available as free downloads for all new iOS devices.
Services
Digital Content and Services
The iTunes Store, available for iOS devices, Mac and Windows personal computers and Apple TV, allows customers to purchase and download music and TV
shows, rent or purchase movies and download free podcasts. The App Store, available for iOS devices, allows customers to discover and download apps and
purchase in-app content. The Mac App Store, available for Mac computers, allows customers to discover, download and install Mac applications. The TV App
Store allows customers access to apps and games specifically for Apple TV. The iBooks Store, available for iOS devices and Mac computers, features e-books
from major and independent publishers. Apple Music offers users a curated listening experience with on-demand radio stations that evolve based on a user's
play or download activity and a subscription-based internet streaming service that also provides unlimited access to the Apple Music library.
iCloud
iCloud is the Company's cloud service which stores music, photos, contacts, calendars, mail, documents and more, keeping them up-to-date and available
across multiple iOS devices, Mac and Windows personal computers and Apple TV. iCloud services include iCloud Drive Ⓡ, iCloud Photo Library, Family
Sharing, Find My iPhone, iPad or Mac, Find My Friends, Notes, iCloud Keychain Ⓡ and iCloud Backup for iOS devices.
AppleCare
The Company offers a range of support options for its customers. These include assistance that is built into software products, electronic product manuals,
online support including comprehensive product information as well as technical assistance, the AppleCare ® Protection Plan ("APP”) and AppleCare+ ("AC+").
APP and AC+ are fee-based services that extend the coverage of phone support eligibility and hardware warranty repairs. APP and AC+ offer additional
coverage under some circumstances for instances of accidental damage and are available in certain countries for certain products.
Apple Pay
Apple Pay is the Company's cashless payment service available in certain countries that offers an easy, secure and private way to pay. Apple Pay allows users
to pay for purchases in participating stores accepting contactless payments and to pay for purchases within participating apps on qualifying devices. Apple Pay
accepts credit and debit cards across major card networks and also supports reward programs and store-issued credit and debit cards. The Company expects to
release an update to iOS 11 and watchOS 4 in fall 2017 that will allow peer-to-peer payments using Apple Pay.
Other Products
Accessories
The Company sells a variety of Apple-branded and third-party accessories, including Beats Ⓡ products, headphones, displays, storage devices, and various
other connectivity and computing products and supplies. In December 2016, the Company released AirPods ®, new wireless headphones that interact with Siri.
Additionally, in June 2017, the Company announced the HomePod TM wireless speaker and in September 2017, announced AirPower™, a new wireless charging
accessory, which are expected to be available in December 2017 and calendar year 2018, respectively.
Apple TV
Apple TV connects to consumers' TVs and enables them to access digital content directly for streaming video, playing music and games, and viewing photos.
Content from Apple Music and other media services is also available on Apple TV. Apple TV allows streaming digital content from Mac and Windows personal
computers through Home Share and from compatible Mac and iOS devices through AirPlay®. Apple TV runs on the Company's tvOS operating system and is
based on apps built for the television. Additionally, the Apple TV remote features Siri, allowing users to search and access content with their voice. In September
2017, the Company introduced Apple TV 4K, which supports 4K and High Dynamic Range content, providing customers with enhanced picture quality.
Apple Inc. | 2017 Form 10-K | 3
Apple Watch
Application Software
Apple Inc. | 2017 Form 10-K | 2
tvOS is the Company's operating system for Apple TV. The tvOS operating system is based on the Company's iOS platform and enables developers to create
new apps and games specifically for Apple TV and deliver them to customers through the Apple TV App Store. tvOS incorporates Siri capabilities that allow
searching across apps and services.
tvOS
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 Digital Content and 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 personal computer or through
iPhone, iPad and iPod touch Ⓡ devices ("iOS devices"), Apple TV 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 high-quality 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, services and technologies.
Business Organization
The Company manages its business primarily on a geographic basis. The Company's reportable segments consist of the Americas, Europe, Greater China,
Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and
Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company's
other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed
separately to better align with the location of the Company's customers and distribution partners and the unique market dynamics of each geographic region.
Further information regarding the Company's reportable segments may be found in Part II, Item 7 of this Form 10-K under the subheading "Segment Operating
Performance," and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment Information and Geographic
Data."
Apple Inc. | 2017 Form 10-K | 1
Products
iPhone
iPhone is the Company's line of smartphones based on its iOS operating system. iPhone includes Siri ®, a voice-activated intelligent assistant, and Apple Pay
and Touch ID Ⓡ on qualifying devices. In September 2017, the Company introduced iPhone 8 and 8 Plus, featuring a new glass and aluminum design, enhanced
cameras and speakers, wireless charging and augmented reality optimization. Additionally, in September 2017, the Company announced iPhone X, featuring an
all-glass design with a Super Retina TM OLED display and facial recognition. iPhone 8 and 8 Plus were available starting in September 2017, and iPhone X is
expected to be available in November 2017. The Company's line of smartphones also includes iPhone 7, 7 Plus, 6s, 6s Plus and SE models. iPhone works with
the iTunes Store, App Store, iBooks Store and Apple Music for purchasing, organizing and playing digital content and apps.
iPad
Apple Watch is a personal electronic device that combines the watchOS user interface and technologies created specifically for a smaller device, including the
Digital Crown TM, a unique navigation tool that allows users to seamlessly scroll, zoom and navigate, and Force Touch, a technology that senses the difference
between a tap and a press and allows users to access controls within apps. Apple Watch enables users to communicate in new ways from their wrist, track their
health and fitness through activity and workout apps, and includes Siri and Apple Pay. In September 2017, the Company introduced Apple Watch Series 3,
featuring health and fitness enhancements and built-in cellular capability on qualifying devices.
iPad is the Company's line of multi-purpose tablets based on its iOS operating system, which includes iPad Pro Ⓡ, iPad and iPad mini™M. iPad includes Siri,
Apple Pay and Touch ID. In June 2017, the Company released a new 10.5-inch iPad Pro and an updated 12.9-inch iPad Pro with more advanced displays and
enhanced performance. iPad works with the iTunes Store, App Store, iBooks Store and Apple Music for purchasing, organizing and playing digital content and
apps.
Mac is the Company's line of desktop and portable personal computers based on its macOS operating system. Mac includes Siri and Apple Pay and also
includes Touch ID on qualifying devices. The Company's desktop computers include iMac ®, 21.5" iMac with Retina Ⓡ 4K display, 27" iMac with Retina 5K
display, Mac Pro Ⓡ and Mac mini Ⓡ. In June 2017, the Company announced the new iMac Pro™, which is expected to be available in December 2017. The
Company's portable computers include MacBook ®, MacBook Air ®, MacBook Pro ® and MacBook Pro with Touch Bar™
Operating Systems
iOS
iOS is the Company's mobile operating system that serves as the foundation for iOS devices. Devices running iOS are compatible with both Mac and Windows
personal computers and Apple's iCloud services. In September 2017, the Company released iOS 11, which includes new iPad features, new capabilities to
improve images in Photos and Camera, enhanced Siri functionality and a redesigned App Store. iOS 11 also introduces ARKit, an augmented reality framework
for developers.
macOS
macOS is the Company's desktop operating system and is built on an open-source UNIX-based foundation and provides an intuitive and integrated computer
experience. Support for iCloud is built into macOS so users can access content and information from Mac, iOS devices and other supported devices and access
downloaded content and apps from the iTunes Store. macOS High Sierra, released in September 2017, is the 14th major release of macOS and incorporates
new storage, video and graphics technologies, and includes improvements to Photos, Safari Ⓡ and Mail.
watchOS
watchOS is the Company's operating system for Apple Watch. In September 2017, the Company released watchOS 4, which adds a proactive Siri watch face
that displays the information users need most throughout the day, personalized activity coaching and a new music experience. watchOS 4 also includes an
enhanced Workout app and introduces Gym Kit TM, a technology platform that offers users connected workouts with cardio equipment.
Mac
iPod touch
iPod touch, based on the Company's iOS operating system, is a flash memory-based digital music and media player that works with the iTunes Store, App
Store, iBooks Store and Apple Music for purchasing and playing digital content and apps.
Developer Programs
Employees
In the Company's experience, the actual amount of product backlog at any particular time is not a meaningful indication of its future business prospects. In
particular, backlog often increases immediately following new product introductions as customers anticipate shortages. Backlog is often reduced once customers
believe they can obtain sufficient supply. Because of the foregoing, backlog should not be considered a reliable indicator of the Company's ability to achieve any
particular level of revenue or financial performance.
Backlog
The Company offers a limited parts and labor warranty on its hardware products. The basic warranty period is typically one year from the date of purchase by
the original end-user. The Company also offers a 90-day limited warranty on the service parts used to repair the Company's hardware products. In certain
jurisdictions, local law requires that manufacturers guarantee their products for a period prescribed by statute, typically at least two years. In addition, where
available, consumers may purchase APP or AC+, which extends service coverage on many of the Company's hardware products.
Warranty
Apple Inc. | 2017 Form 10-K | 6
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.
Business Seasonality and Product Introductions
As of September 30, 2017, the Company had approximately 123,000 full-time equivalent employees.
Substantially all of the Company's hardware products are currently manufactured by outsourcing partners that are located primarily in Asia, with some Mac
computers manufactured in the U.S. and Ireland. The supply and manufacture of a number of components is performed by sole-sourced outsourcing partners in
the U.S., Asia and Europe. Margins on sales of the Company's products in foreign countries and on sales of products that include components obtained from
foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade regulations, including tariffs and
antidumping penalties. Information regarding concentration in the available sources of supply of materials and products is set forth in Part II, Item 8 of this Form
10-K in the Notes to Consolidated Financial Statements in Note 10, "Commitments and Contingencies."
Foreign and Domestic Operations and Geographic Data
Many of the Company's products are designed to include intellectual property obtained from third parties. It may be necessary in the future to seek or renew
licenses relating to various aspects of its products, processes and services. While the Company has generally been able to obtain such licenses on
commercially reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future on reasonable terms or at all. Because of
technological changes in the industries in which the Company competes, current extensive patent coverage and the rapid rate of issuance of new patents, it is
possible that certain components of the Company's products, processes and services may unknowingly infringe existing patents or intellectual property rights of
others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties.
The Company regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing thousands of
patent applications around the world. Over time, the Company has accumulated a large portfolio of issued patents, including utility patents, design patents and
others. The Company also holds copyrights relating to certain aspects of its products and services. No single intellectual property right is solely responsible for
protecting the Company's products. The Company believes the duration of its intellectual property rights is adequate relative to the expected lives of its
products.
The Company currently holds a broad collection of intellectual property rights relating to certain aspects of its hardware devices, accessories, software and
services. This includes patents, copyrights, trademarks, service marks, trade dress and other forms of intellectual property rights in the U.S. and a number of
foreign countries. Although the Company believes the ownership of such intellectual property rights is an important factor in its business and that its success
does depend in part on such ownership, the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.
Intellectual Property
Because the industries in which the Company competes are characterized by rapid technological advances, the Company's ability to compete successfully
depends heavily upon its ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. The Company
continues to develop new technologies to enhance existing products and services, and to expand the range of its offerings through R&D, licensing of intellectual
property and acquisition of third-party businesses and technology. Total R&D expense was $ 11.6 billion, $ 10.0 billion and $ 8.1 billion in 2017, 2016 and 2015
respectively.
Research and Development
Substantially all of the Company's hardware products are currently manufactured by outsourcing partners that are located primarily in Asia, with some Mac
computers manufactured in the U.S. and Ireland. A significant concentration of this manufacturing is currently performed by a small number of outsourcing
partners, often in single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the
Company's products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company's operating results could be
adversely affected if its outsourcing partners were unable to meet their production commitments. The Company's manufacturing purchase obligations typically
cover its requirements for periods up to 150 days.
During 2017, the Company's domestic and international net sales accounted for 37% and 63%, respectively, of total net sales. Information regarding financial
data by geographic segment is set forth in Part II, Item 7 of this Form 10-K under the subheading "Segment Operating Performance," and in Part II, Item 8 of this
Form 10-K in the Notes to Consolidated Financial Statements in Note 11, “Segment Information and Geographic Data."
Business Strategy
Available Information
Apple Inc. | 2017 Form 10-K | 7
The Company's developer programs support app developers with building, testing and distributing apps for iOS, macOS, watchOS and tvOS. Developer
program membership provides access to beta software and advanced app capabilities (e.g., CloudKit ®, HealthKit TM and Apple Pay), the ability to test apps
using TestFlight Ⓡ, distribution on the App Store, access to App Analytics and code-level technical support. Developer programs also exist for businesses
creating apps for internal use (the Apple Developer Enterprise Program) and developers creating accessories for Apple devices (the MFi Program). All
developers, even those who are not developer program members, can sign in with their Apple ID to post on the Apple Developer Forums and use Xcode Ⓡ, the
Company's integrated development environment for creating apps for Apple platforms. Xcode includes project management tools; analysis tools to collect,
display and compare app performance data; simulation tools to locally run, test and debug apps; and tools to simplify the design and development of user
interfaces. All developers also have access to extensive technical documentation and sample code.
Markets and Distribution
The Company's customers are primarily in the consumer, small and mid-sized business, education, enterprise and government markets. The Company sells its
products and resells third-party products in most of its major markets directly to consumers and small and mid-sized businesses through its retail and online
stores and its direct sales force. The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers,
retailers and value-added resellers. During 2017, the Company's net sales through its direct and indirect distribution channels accounted for 28% and 72%,
respectively, of total net sales.
The Company believes that sales of its innovative and differentiated products and services are enhanced by knowledgeable salespersons who can convey the
value of the hardware and software integration and demonstrate the unique solutions that are available on its products. The Company further believes providing
direct contact with its targeted customers is an effective way to demonstrate the advantages of its products over those of its competitors and providing a high-
quality sales and after-sales support experience is critical to attracting new and retaining existing customers.
To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company continues to build and improve its
distribution capabilities by expanding the number of its own retail stores worldwide. The Company's retail stores are typically located at high-traffic locations in
quality shopping malls and urban shopping districts. By operating its own stores and locating them in desirable high-traffic locations the Company is better
positioned to ensure a high-quality customer buying experience and attract new customers. The stores are designed to simplify and enhance the presentation
and marketing of the Company's products and related solutions. The retail stores employ experienced and knowledgeable personnel who provide product
advice, service and training, and offer a wide selection of third-party hardware, software and other accessories that complement the Company's products.
The Company has also invested in programs to enhance reseller sales by placing high-quality Apple fixtures, merchandising materials and other resources
within selected third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus on the Apple platform by providing
a high level of product expertise, integration and support services.
The Company is committed to delivering solutions to help educators teach and students learn. The Company believes effective integration of technology into
classroom instruction can result in higher levels of student achievement and has designed a range of products, services and programs to address the needs of
education customers. The Company also supports mobile learning and real-time distribution of, and access to, education-related materials through iTunes UⓇ,
a platform that allows students and teachers to share and distribute educational media online. The Company sells its products to the education market through
its direct sales force, select third-party resellers and its retail and online stores.
Apple Inc. | 2017 Form 10-K | 4
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 Securities and Exchange Commission (the
"SEC"). The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information
Iwith 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 information contained on the websites referenced in this Form 10-K
is not incorporated by reference into this filing. Further, the Company's references to website URLs are intended to be inactive textual references only.
The Company also sells its hardware and software products to enterprise and government customers in each of its reportable segments. The Company's
products are deployed in these markets because of their performance, productivity, ease-of-use and seamless integration into information technology
environments. The Company's products are compatible with thousands of third-party business applications and services, and its tools enable the development
and secure deployment of custom applications as well as remote device administration.
Competition
The markets for the Company's products and services are highly competitive and the Company is confronted by aggressive competition in all areas of its
business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities
and use of mobile communication and media devices, personal computers and other digital electronic devices. Many of the Company's competitors that sell
mobile devices and personal computers based on other operating systems seek to compete primarily through aggressive pricing and very low cost structures.
The Company's financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins.
Principal competitive factors important to the Company include price, product features (including security features), relative price and performance, product
quality and reliability, design innovation, a strong third-party software and accessories ecosystem, marketing and distribution capability, service and support and
corporate reputation.
The Company is focused on expanding its market opportunities related to personal computers and mobile communication and media devices. These markets
are highly competitive and include many large, well-funded and experienced participants. The Company expects competition in these markets to intensify
significantly as competitors attempt to imitate some of the features of the Company's products and applications within their own products or, alternatively,
collaborate with each other to offer solutions that are more competitive than those they currently offer. These markets are characterized by aggressive price
competition, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by
competitors and price sensitivity on the part of consumers and businesses.
The Company's digital content services have faced significant competition from other companies promoting their own digital music and content products and
services, including those offering free peer-to-peer music and video services.
The Company's future financial condition and operating results depend on the Company's ability to continue to develop and offer new innovative products and
services in each of the markets in which it competes. The Company believes it offers superior innovation and integration of the entire solution including the
hardware (iOS devices, Mac, Apple Watch and Apple TV), software (iOS, macOS, watchOS and tvOS), online services and distribution of digital content and
applications (Digital Content and Services). Some of the Company's current and potential competitors have substantial resources and may be able to provide
such products and services at little or no profit or even at a loss to compete with the Company's offerings.
Supply of Components
Although most components essential to the Company's business are generally available from multiple sources, a few components are currently obtained from
single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media
devices and personal computers. Therefore, many components used by the Company, including those that are available from multiple sources, are at times
subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Company's financial condition and operating
results.
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize
custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the
suppliers' yields have matured or manufacturing capacity has increased. If the Company's supply of components for a new or existing product were delayed or
constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company's financial condition and operating results
could be materially adversely affected. The Company's business and financial performance could also be materially adversely affected depending on the time
required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of
these components at acceptable prices, or at all, may be affected if those suppliers decide to concentrate on the production of common components instead of
components customized to meet the Company's requirements.
No single customer accounted for more than 10% of net sales in 2017, 2016 and 2015.
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Item 14.
This Annual Report on Form 10-K ("Form 10-K") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995,
that involve risks and uncertainties. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements provide current expectations of future events based on
certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by
words such as "future," "anticipates," "believes," "estimates," "expects," "intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms.
Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under
the heading "Risk Factors," which are incorporated herein by reference. 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.
PART I
Item 1.
Business
Company Background
The Company designs, manufactures and markets mobile communication and media devices and personal computers, 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, Apple Watch ®, Apple TV ®, a portfolio of consumer and professional software applications, iOS, macOS ®, watchOS Ⓡ and tvOST 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 "Digital Content and 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 retail and online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and
government customers. The Company's fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company is a California
corporation established in 1977.
11
(a) General. The Committee may, in its discretion, include performance conditions in an Award. If performance conditions are included in Awards
to Covered Employees and such Awards are intended to qualify as "performance-based compensation" under Code Section 162(m), then such
Awards will be subject to the achievement of Performance Goals with respect to a Performance Period established by the Committee. Such Awards
shall be granted and administered pursuant to the requirements of Code Section 162(m), unless the Committee subsequently determines that such
Awards are not, or are no longer, intended to qualify as "performance-based compensation" under Code Section 162(m). The Committee may
provide at the time it establishes the applicable Performance Goals, or at a later time which is within the period during which Performance Goals in
respect of the applicable Award may be established consistent with the Award qualifying as "performance-based compensation" under Code Section
162(m), for the Performance Goals (or performance against the Performance Goals, as the case may be) to be adjusted to mitigate the unbudgeted
impact of material, unusual or nonrecurring gains and losses, accounting changes or other events specified by the Committee. Before any Shares
underlying an Award or any Award payments are released to a Covered Employee with respect to a Performance Period, the Committee shall certify
in writing that the Performance Goals for such Performance Period have been satisfied. Awards with performance conditions that are granted to
Participants who are not Covered Employees need not comply with the requirements of Code Section 162(m).
SECTION 10. PERFORMANCE-BASED AWARDS; CASH BONUS AWARDS.
(f) Creditors' Rights. A holder of Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted
Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Restricted Stock
Unit Agreement.
13
(e) Voting and Dividend Rights. The holders of Restricted Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Restricted
Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to
be credited with an amount equal to all cash dividends paid on one Share while the Restricted Stock Unit is outstanding. Dividend equivalents may
be converted into additional Restricted Stock Units and may (and will, to the extent required below) be made subject to the same conditions and
restrictions as the Restricted Stock Units to which they attach. Settlement of dividend equivalents may be made in the form of cash, in the form of
Shares, or in a combination of both. Dividend equivalents as to Restricted Stock Units that are subject to performance-based vesting requirements
will be subject to forfeiture and termination to the same extent as the corresponding Restricted Stock Units to which the dividend equivalents relate.
(d) Form and Time of Settlement of Restricted Stock Units. Settlement of vested Restricted Stock Units may be made in the form of (i) cash,
(ii) Shares or (iii) any combination of both, as determined by the Committee at the time of the grant of the Restricted Stock Units, in its sole
discretion. Vested Restricted Stock Units may be settled in a lump sum or in installments as determined by the Committee and provided in the
Restricted Stock Unit Agreement. The distribution may occur or commence when the vesting conditions applicable to the Restricted Stock Units
have been satisfied or have lapsed, or, if the Committee so provides in the Restricted Stock Unit Agreement, it may be deferred, in accordance with
Applicable Laws, to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents, as
determined by the Committee and provided in the Restricted Stock Unit Agreement.
(a) Restricted Stock Unit Agreement. Each Restricted Stock Unit granted under the Plan shall be evidenced by a Restricted Stock Unit Agreement
between the Participant and the Company. Such Restricted Stock Unit shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Unit Agreements entered into under the Plan need
not be identical.
(b) Number of Shares. Each Restricted Stock Unit Agreement shall specify the number of Restricted Stock Units to which the Restricted Stock Unit
Award pertains, which number is subject to adjustment in accordance with Section 11.
(b) Cash Bonus Awards. The Committee may, in its discretion, grant Cash Bonus Awards under the Plan to one or more Employees of the
Company or any of its Subsidiaries. Cash Bonus Awards may be subject to performance conditions as described in Section 10(a). To the extent
Cash Bonus Awards are granted to Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m),
such Cash Bonus Awards shall be subject to the requirements of Code Section 162(m), including without limitation, the establishment of
Performance Goals and certification of performance by the Committee as set forth above, unless the Committee subsequently determines that such
Cash Bonus Awards are not, or are no longer, intended to qualify as "performance-based compensation" under Code Section 162(m). In addition,
the aggregate amount of compensation to be paid to any one Participant in any one Fiscal Year in respect of all Cash Bonus Awards granted
pursuant to this Section 10(b) shall not exceed $30,000,000. For purposes of clarity of the preceding sentence, "Cash Bonus Awards granted
pursuant to this Section 10(b)" shall not include (i) Restricted Stock Unit awards settled in cash based on the fair market value of the Shares subject
thereto, which Awards are subject to the limit set forth in Section 5(c)(ii), (ii) cash-settled SARS, which are subject to the limit set forth in
Section 5.2(c)(i), and (iii) discretionary cash incentive payments awarded by the Board or the Committee outside of the Plan.
SECTION 9. TERMS AND CONDITIONS OF RESTRICTED STOCK UNITS.
(e) Voting and Dividend Rights. The holder of a Stock Grant awarded under the Plan shall have the same voting, dividend and other rights as the
Company's other shareholders, except as otherwise stated in the Stock Grant Agreement; provided, however, that any dividends as to the portion of
a Stock Grant that is subject to performance-based vesting requirements will be subject to forfeiture and termination (or repayment, as applicable) to
the same extent as the corresponding portion of the Stock Grant to which such dividends relate. A Stock Grant Agreement may require that the
holder of such Stock Grant invest any cash dividends received in additional Shares subject to the Stock Grant. Such additional Shares and any
Shares received as a dividend pursuant to the Stock Grant shall be subject to the same conditions and restrictions as the Stock Grant with respect
to which the dividends were paid.
12
(c) Vesting Conditions. The Committee shall determine the vesting schedule of each Restricted Stock Unit Award. Vesting shall occur, in full or in
installments, upon satisfaction of the conditions specified in the Restricted Stock Unit Agreement, which may include performance conditions or
Performance Goals pursuant to Section 10.
(၁)
SECTION 11. PROTECTION AGAINST DILUTION.
14
(d) Vesting Conditions. The Committee shall determine the vesting schedule of each Stock Grant. Vesting shall occur, in full or in installments,
upon satisfaction of the conditions specified in the Stock Grant Agreement, which may include performance conditions or Performance Goals
pursuant to Section 10.
(a)
Adjustments. Subject to Section 12, upon (or, as may be necessary to effect the adjustment, immediately prior to): any reclassification,
recapitalization, stock split (including a stock split in the form of a stock dividend) or reverse stock split; any merger, combination, consolidation, or
other reorganization; any spin-off, split-up, or extraordinary dividend distribution in respect of the Common Stock; or any exchange of Common
Stock or other securities of the Company, or any similar, unusual or extraordinary corporate transaction in respect of the Common Stock, then the
Committee shall equitably and proportionately adjust (1) the number and type of Shares (or other securities) that thereafter may be made the subject
of Awards (including the specific Share limits, maximums and numbers of Shares set forth elsewhere in the Plan), (2) the number, amount and type
of Shares (or other securities or property) subject to any outstanding Awards, (3) the grant, purchase, or Exercise Price of any outstanding Awards,
and/or (4) the securities, cash or other property deliverable upon exercise or payment of any outstanding Awards, in each case to the extent
necessary to preserve (but not increase) the level of incentives intended by the Plan and the then-outstanding Awards.
Unless otherwise expressly provided in the applicable Award Agreement, upon (or, as may be necessary to effect the adjustment, immediately prior
to) any event or transaction described in the preceding paragraph or a sale of all or substantially all of the business or assets of the Company as an
entirety, the Company shall equitably and proportionately adjust the Performance Goals applicable to any then-outstanding performance-based
Awards to the extent necessary to preserve (but not increase) the level of incentives intended by the Plan and the then-outstanding performance-
based Awards.
It is intended that, unless otherwise determined by the Committee, any adjustments contemplated by the preceding two paragraphs be made in a
manner that satisfies applicable legal, tax (including, without limitation and as applicable in the circumstances, Code Sections 424 409A and 162(m))
and accounting (so as to not trigger any charge to earnings with respect to such adjustment) requirements.
Without limiting the generality of Section 3, any good faith determination by the Committee as to whether an adjustment is required in the
circumstances pursuant to this Section 11(a), and the extent and nature of any such adjustment, shall be conclusive and binding on all persons.
(b)
Participant Rights. Except as provided in this Section 11, a Participant shall have no rights by reason of any issue by the Company of stock of
any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of any class. If by reason of an adjustment pursuant to this Section 11 a
Participant's Award covers additional or different shares of stock or securities, then such additional or different shares and the Award in respect
thereof shall be subject to all of the terms, conditions and restrictions which were applicable to the Award and the Shares subject to the Award prior
to such adjustment, unless otherwise determined in the sole discretion of the Committee.
SECTION 12. CORPORATE TRANSACTIONS.
Upon the occurrence of any of the following: any merger, combination, consolidation, or other reorganization in which the Company does not survive
(or does not survive as a public company in respect of its Common Stock); any exchange of Common Stock or other securities of the Company in
which the Company does not survive (or does not survive as a public company in respect of its Common Stock); a sale of all or substantially all the
business, stock or assets of the Company; a dissolution of the Company; or any other event in which
15
the Company does not survive (or does not survive as a public company in respect of its Common Stock); then the Committee may make provision
for a cash payment in settlement of, or for the assumption, substitution or exchange of any or all outstanding Share-based Awards or the cash,
securities or property deliverable to the holder of any or all outstanding Share-based Awards, based upon, to the extent relevant under the
circumstances, the distribution or consideration payable to holders of the Common Stock upon or in respect of such event. Upon the occurrence of
any event described in the preceding sentence, then, unless the Committee has made a provision for the substitution, assumption, exchange or
other continuation or settlement of the Award or the Award would otherwise continue in accordance with its terms in the circumstances, each Award
shall terminate upon the related event; provided that the holder of an Option or SAR shall be given reasonable advance notice of the impending
termination and a reasonable opportunity to exercise his or her outstanding vested Options and SARs in accordance with their terms before the
termination of such Awards (except that in no case shall more than ten days' notice of the impending termination be required).
Expiration of Grant Authority. As required pursuant to Code Section 162(m) and the regulations promulgated thereunder, the Committee's
authority to grant new Awards that are intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code
(other than Options and SARs) shall terminate upon the first meeting of the Company's shareholders that occurs in 2021, subject to extension upon
shareholder re-approval of the “material terms of the performance goal" under the Plan, as described in the regulations promulgated under Code
Section 162(m).
(c) Number of Shares. Each Stock Grant Agreement shall specify the number of Shares to which the Stock Grant pertains, which number is
subject to adjustment in accordance with Section 11.
Exercise of SARs. Upon exercise of a SAR, the Participant (or any person having the right to exercise the SAR after Participant's death) shall
receive from the Company (i) Shares, (ii) cash or (iii) any combination of Shares and cash, as the Committee shall determine at the time of grant of
the SAR, in its sole discretion. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARS shall, in the aggregate,
be equal to the amount by which the aggregate Fair Market Value (on the date of exercise) of the Shares subject to the exercised SARS exceeds the
aggregate Exercise Price of the exercised SARS.
(a) Time, Amount and Form of Awards. Awards under this Section 8 may be granted in the form of a Stock Grant.
grant, the Shares underlying such forfeited or terminated Awards were counted as two (2) Shares against the Plan reserve. Shares that are
exchanged by a Participant or withheld by the Company as full or partial payment in connection with any Option or SAR, as well as any Shares
exchanged by a Participant or withheld by the Company or one of its Subsidiaries to satisfy the tax withholding obligations related to any Option or
SAR, shall not be available for subsequent Awards under the Plan. Shares that are exchanged by a Participant or withheld by the Company as full
or partial payment in connection with any Full-Value Award, as well as any Shares exchanged by a Participant or withheld by the Company or one of
its Subsidiaries to satisfy the tax withholding obligations related to any Full-Value Award, shall be available for subsequent Awards under the Plan;
provided that any one (1) Share so exchanged or withheld in connection with any Full-Value Award shall be credited as two (2) Shares when
determining the number of Shares that shall again become available for Awards under the Plan if upon grant, the Shares underlying the related Full-
Value Award were counted as two (2) Shares against the Plan reserve. Refer to Section 15(i) for application of the foregoing share limits with
respect to substituted awards.
(c) Share Limits
(d)
(i) Limits on Options and SARs. No Participant shall receive Options or SARs during any Fiscal Year covering, in the aggregate, in excess
of 7,000,000 Shares, subject to adjustment pursuant to Section 11.
(ii) Limits on Stock Grants and Restricted Stock Units. No Participant shall receive Stock Grants or Restricted Stock Units during any
Fiscal Year covering, in the aggregate, in excess of 7,000,000 Shares (for this purpose, (A) counting such Shares on a 1-for-1 basis and (B)
for Stock Grants or Restricted Stock Units as to which the number of Shares earned is dependent on the level of attainment of performance
vesting conditions, counting in respect thereof the number of Shares that may be earned at maximum performance), subject to adjustment
pursuant to Section 11.
Reservation of Shares; No Fractional Shares. The Company shall at all times reserve a number of Shares sufficient to cover the Company's
obligations and contingent obligations to deliver Shares with respect to Awards then outstanding under the Plan (exclusive of (i) any Awards payable
in cash and (ii) any dividend equivalent obligations to the extent the Company has the right to settle such rights in cash). No fractional Shares shall
be delivered under the Plan. The Committee may pay cash in lieu of any fractional Shares in settlements of Awards under the Plan.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) Stock Option Agreement. Each Option granted under the Plan shall be evidenced and governed exclusively by a Stock Option Agreement
between the Participant and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any
other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in a Stock Option
Agreement. Dividend equivalent rights shall not be awarded on Options. The provisions of the various Stock Option Agreements entered into under
the Plan need not be identical. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO.
(b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option, which number is subject to
adjustment in accordance with Section 11.
10
10
(c) Exercise Price. Each Stock Option Agreement shall specify the Option's Exercise Price which shall be established by the Committee and is
subject to adjustment in accordance with Section 11. The Exercise Price of an Option shall not be less than 100% of the Fair Market Value (110%
for an ISO granted to a 10-Percent Stockholder) on the Grant Date.
(d)
Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become
exercisable and/or any performance conditions or Performance Goals pursuant to Section 10 that must be satisfied before the Option may be
exercised. The Stock Option Agreement shall also specify the maximum term of the Option; provided that the maximum term of an Option shall in no
event exceed seven (7) years from the Grant Date. Notwithstanding any other provision of the Plan or the Stock Option Agreement, no Option can
be exercised after the expiration date provided in the applicable Stock Option Agreement.
(e) Method of Exercise. An Option may be exercised, in whole or in part, by giving written notice of exercise to the Company or the Company's
designee (or, subject to Applicable Laws and if the Company permits, by electronic or voice methods) of the number of Shares to be purchased.
Such notice shall be accompanied by payment in full of the aggregate Exercise Price, plus any required withholdings (unless satisfactory
arrangements have been made to satisfy such withholdings). The Company reserves the right to delay issuance of the Shares until such payment
obligations are fully satisfied.
(f)
Payment for Option Shares. The Exercise Price of an Option shall be paid in cash at the time of exercise, except as follows and if so provided
for in the applicable Stock Option Agreement:
(i) Cashless Exercise. Payment of all or a part of the Exercise Price may be made through Cashless Exercise.
(ii) Other Forms of Payment. Payment may be made in any other form that is consistent with Applicable Laws, regulations and rules and
approved by the Committee.
In the case of an ISO granted under the Plan, except to the extent permitted by Applicable Laws, payment shall be made only pursuant to the
express provisions of the applicable Stock Option Agreement. In the case of an NSO granted under the Plan, the Committee may, in its discretion at
any time, accept payment in any form(s) described in this Section 6(f).
SECTION 7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.
(a) SAR Agreement. Each SAR granted under the Plan shall be evidenced by a SAR Agreement between the Participant and the Company. Such
SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. A SAR
Agreement may provide for a maximum limit on the amount of any payout notwithstanding the Fair Market Value on the date of exercise of the SAR.
Dividend equivalent rights shall not be awarded on SARs. The provisions of the various SAR Agreements entered into under the Plan need not be
identical.
(b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains, which number is subject to
adjustment in accordance with Section 11.
(၁)
Exercise Price. Each SAR Agreement shall specify the Exercise Price, which is subject to adjustment in accordance with Section 11. A SAR
Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding, provided that in all
cases and at all times the Exercise Price of a SAR shall not be less than 100% of the Fair Market Value on the Grant Date.
(d) Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable and/or
any performance conditions or Performance Goals pursuant to Section 10 that must be satisfied before the SAR is exercised. The SAR Agreement
shall also specify the maximum term of the SAR which shall not exceed seven (7) years from the Grant Date. SARS may be awarded in combination
with Options or Stock Grants, and such an Award shall provide that the SARS will not be exercisable unless the related Options or Stock Grants are
forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or at any subsequent time.
Notwithstanding any other provision of the Plan or the SAR Agreement, no SAR can be exercised after the expiration date provided in the applicable
SAR Agreement.
(e)
The Committee may adopt such valuation methodologies for outstanding Awards as it deems reasonable in the event of a cash or property
settlement and, in the case of Options, SARS or similar rights, but without limitation on other methodologies, may base such settlement solely upon
the excess if any of the per share amount payable upon or in respect of such event over the Exercise Price of the Award.
SECTION 8. TERMS AND CONDITIONS FOR STOCK GRANTS.
(b) Stock Grant Agreement. Each Stock Grant awarded under the Plan shall be evidenced and governed exclusively by a Stock Grant Agreement
between the Participant and the Company. Each Stock Grant shall be subject to all applicable terms and conditions of the Plan and may be subject
to any other terms and conditions that are not inconsistent with the Plan that the Committee deems appropriate for inclusion in the applicable Stock
Grant Agreement. The provisions of the Stock Grant Agreements entered into under the Plan need not be identical.
In any of the events referred to in this Section 12, the Committee may take such action contemplated by this Section 12 prior to such event (as
opposed to on the occurrence of such event) to the extent that the Committee deems the action necessary to permit the Participant to realize the
benefits intended to be conveyed with respect to the underlying Shares.
Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Consultant or director
of the Company, a Parent, or any Subsidiary. The Company and its Parent and Subsidiaries reserve the right to terminate the service of any person
at any time, and for any reason, subject to applicable laws, the Company's Articles of Incorporation and Bylaws and any applicable written
employment agreement (if any), and such terminated person shall be deemed irrevocably to have waived any claim to damages or specific
performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan or any outstanding Award
that is forfeited and/or is terminated by its terms or to any future Award.
SECTION 13. LIMITATIONS ON RIGHTS.
Without limiting the generality of Section 3, any good faith determination by the Committee pursuant to its authority under this Section 12 shall be
conclusive and binding on all persons.
An Award granted under the Plan will be subject to any provisions of Applicable Laws providing for the recoupment or clawback of incentive
compensation; the terms of any Company recoupment, clawback or similar policy in effect at the time of grant of the Award; and any recoupment,
clawback or similar provisions that may be included in the applicable Award Agreement.
(j)
Stock-Based Awards in Substitution for Stock Options or Awards Granted by Other Company. Awards may be granted under the Plan in
substitution for or in connection with an assumption of employee, director and/or consultant stock options, stock appreciation rights, restricted stock
or other stock-based awards granted by other entities to persons who are or who will become Employees or Consultants in respect of the Company
or one of its Subsidiaries in connection with a distribution, merger or other reorganization by or with the granting entity or an affiliated entity, or the
acquisition by the Company or one of its Subsidiaries, directly or indirectly, of all or a substantial part of the stock or assets of the granting entity.
The Awards so granted may reflect the original terms of the related award being assumed or substituted for and need not comply with other specific
terms of the Plan, with Common Stock substituted for the securities covered by the original award and with the number of Shares subject to such
awards, as well as any exercise or purchase prices applicable to such awards, adjusted to account for differences in stock prices in connection with
the transaction. Any shares that are delivered and any Awards that are granted by, or become obligations of, the Company, as a result of any such
assumption or substitution in connection with any such transaction shall not be counted against the Share limit or other limits on the number of
Shares available for issuance under the Plan, unless determined otherwise by the Company.
(i)
of the Company to make or authorize: (i) any adjustment, recapitalization, reorganization or other change in the capital structure or business of the
Company or any Subsidiary, (ii) any merger, amalgamation, consolidation or change in the ownership of the Company or any Subsidiary, (iii) any
issue of bonds, debentures, capital, preferred or prior preference stock ahead of or affecting the capital stock (or the rights thereof) of the Company
or any Subsidiary, (iv) any dissolution or liquidation of the Company or any Subsidiary, (v) any sale or transfer of all or any part of the assets or
business of the Company or any Subsidiary, (vi) the payment at the discretion of the Board or the Committee of any type or form of compensation
that may be made at law and without contravention of any requirement of the principal exchange upon which the Shares are traded; or (vii) any
other corporate act or proceeding by the Company or any Subsidiary. No Participant, beneficiary or any other person shall have any claim under any
Award or Award Agreement against any member of the Board or the Committee, or the Company or any Employees, officers or agents of the
Company or any Subsidiary, as a result of any such action.
18
(h) No Corporate Action Restriction. The existence of the Plan, the Award Agreements and the Awards granted hereunder shall not limit, affect or
restrict in any way the right or power of the Board or the shareholders
(g) Section Headings. Captions and headings are given to the sections and subsections of the Plan solely as a convenience to facilitate reference.
Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.
(f) Severability. If a court of competent jurisdiction holds any provision invalid and unenforceable, the remaining provisions of the Plan shall
continue in effect.
(e) Governing Law. The Plan shall be governed by, and construed in accordance with the laws of the State of California (except its choice-of-law
provisions) and applicable U.S. Federal Laws.
Limitations on Amendments to Plan and Awards. No amendment, suspension or termination of the Plan or amendment of any outstanding
Award Agreement shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of
the Participant or obligations of the Company under any Award granted under the Plan prior to the effective date of such change. Changes,
settlements and other actions contemplated by Section 11 shall not be deemed to constitute changes or amendments for purposes of this
Section 15.
(d)
(c) Amendments to Awards. Without limiting any other express authority of the Committee under (but subject to) the express limits of the Plan, the
Committee by agreement or resolution may waive conditions of or limitations on Awards to Participants that the Committee in the prior exercise of its
discretion has imposed, without the consent of a Participant, and (subject to the requirements of Sections 3 and 15(d)) may make other changes to
the terms and conditions of Awards. No amendment of an Award, however, shall constitute a Re-Pricing without shareholder approval or otherwise
authorize any action that may only be taken at law or under the rules of the principal exchange upon which the Shares are listed to trade with the
consent or approval of shareholders without obtaining or conditioning such action on the receipt of such consent or approval.
19
(a) Term of the Plan. The Board adopted this Plan on November 19, 2013 (the "Effective Date"). The Plan shall terminate on the day before the
tenth anniversary of the Effective Date and may be terminated on any earlier date pursuant to this Section 15.
(b) Amendment or Termination of the Plan. The Board may, at any time, terminate or, from time to time, amend, modify or suspend the Plan, in
whole or in part. No awards may be granted during any period that the Board suspends the Plan. To the extent then required by Applicable Laws or
required under Code Sections 162, 422 or 424 to preserve the intended tax consequences of the Plan, or deemed necessary or advisable by the
Board, any amendment to the Plan shall be subject to shareholder approval.
(a) Participant Rights. A Participant's rights, if any, in respect of or in connection with any Award are derived solely from the discretionary decision
of the Company to permit the individual to participate in the Plan and to benefit from a discretionary Award. By accepting an Award under the Plan, a
Participant expressly acknowledges that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards.
Any Award granted hereunder is not intended to be compensation of a continuing or recurring nature, or part of a Participant's normal or expected
compensation, and in no way represents any portion of a Participant's salary, compensation, or other remuneration for purposes of pension benefits,
severance, redundancy, resignation or any other purpose.
16
(b) Shareholders' Rights. Except as provided in Section 8(e), a Participant shall have no dividend rights, voting rights or other rights as a
shareholder with respect to any Shares covered by his or her Award prior to the issuance of such Shares (as evidenced by an appropriate entry on
the books of the Company or a duly authorized transfer agent of the Company). No adjustment shall be made for cash dividends or other rights for
which the record date is prior to the date when such Shares are issued, except as expressly provided in Sections 8(e), 9(e) and 11.
SECTION 14. WITHHOLDING TAXES; SECTION 409A.
(c) Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Shares or other securities
under the Plan shall be subject to all Applicable Laws and such approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Shares or other securities pursuant to any Award prior to the satisfaction of all legal requirements
relating to the issuance of such Shares or other securities, to their registration, qualification or listing or to an exemption from registration,
qualification or listing. The person acquiring any securities under the Plan will, if requested by the Company or one of its Subsidiaries, provide such
assurances and representations to the Company or one of its Subsidiaries as the Committee may deem necessary or desirable to assure
compliance with all applicable legal, tax, and accounting requirements.
(b) Share Withholding. The Committee may (i) permit or require a Participant to satisfy all or part of his or her withholding or income tax obligations
by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her, or (ii) permit a Participant to satisfy
such obligations by Cashless Exercise or by surrendering all or a portion of any Shares that he or she previously acquired, provided that the
previously owned Shares have been held for a minimum duration (if any) determined satisfactory as established by the Committee in its sole and
absolute discretion. Any payment of taxes by assigning Shares to the Company may be subject to restrictions, including, but not limited to, any
restrictions established by the Committee or required by rules of the SEC. If any Shares are used to satisfy withholding taxes, such Shares shall be
valued based on the Fair Market Value thereof on the date when the withholding for taxes is required to be made.
(c) Section 409A. This Plan is intended to comply with the requirements of Code Section 409A or an exemption or exclusion therefrom and, with
respect to amounts that are subject to Code Section 409A, it is intended that this Plan be administered in all respects in accordance with Code
Section 409A. Each payment under any Award that constitutes nonqualified deferred compensation subject to Code Section 409A shall be treated
as a separate payment for purposes of Code Section 409A. In no event may a Participant, directly or indirectly, designate the calendar year of any
payment to be made under any Award that constitutes nonqualified deferred compensation subject to Code Section 409A. Notwithstanding any
other provision of this Plan or any Award Agreement to the contrary, if a Participant is a "specified employee" within the meaning of Code Section
409A (as determined in accordance with the methodology established by the Company), amounts in respect of an Award that constitute
"nonqualified deferred compensation" within the meaning of
17
Code Section 409A that would otherwise be payable by reason of a Participant's Separation from Service during the six-month period immediately
following such Separation from Service shall instead be paid or provided on the first business day following the date that is six months following the
Participant's Separation from Service. If the Participant dies following the Separation from Service and prior to the payment of any amounts delayed
on account of Code Section 409A, such amounts shall be paid to the personal representative of the Participant's estate within 30 days following the
date of the Participant's death.
SECTION 15. DURATION AND AMENDMENTS; MISCELLANEOUS.
(a) General. A Participant shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in
connection with his or her Award. The Company shall have the right to deduct from any amount payable under the Plan, including delivery of Shares
to be made pursuant to an Award granted under the Plan, all federal, state, city, local or foreign taxes of any kind required by law to be withheld with
respect to such payment and the Company may take any such actions as may be necessary in the opinion of the Company to satisfy all obligations
for the payment of such taxes. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.
Vesting Schedule:
Target No. of Units
Subject to Award:
Award Date:
Performance Period:
(the "Participant")
APPLE INC.
2014 EMPLOYEE STOCK PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT
PERFORMANCE AWARD
Grant Number:
(the "Award Date")
6
Employee ID:
23.
Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant's
participation in the Plan, on the Stock Units and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or
advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or undertakings that may be
necessary to accomplish the foregoing.
24.
Severability. The provisions of this Award Agreement are severable and if any one of more provisions are determined to be illegal
or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
Construction. It is intended that the terms of the Award will not result in the imposition of any tax liability pursuant to Section 409A
of the Code. This Award Agreement shall be construed and interpreted consistent with that intent.
22.
21. Choice of Venue. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties
evidenced by this grant or this Award Agreement, the parties hereby submit to the exclusive jurisdiction of the State of California and agree that
such litigation shall be conducted only in the courts of Santa Clara County, California, or the federal courts for the Northern District of California, and
no other courts, where this grant is made and/or to be performed.
20. Governing Law. This Award Agreement shall be governed by and construed and enforced in accordance with the laws of the State
of California without regard to conflict of law principles thereunder.
19. Section Headings. The section headings of this Award Agreement are for convenience of reference only and shall not be deemed
to alter or affect any provision hereof.
Counterparts. This Award Agreement may be executed simultaneously in any number of counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same instrument.
18.
NOTICE OF GRANT
5
Name:
Exhibit 10.21
1
You do not have to accept the Award. If you wish to decline your Award, you should promptly notify Apple Inc.'s Stock Plan Group of your
decision at stock@apple.com. If you do not provide such notification within thirty (30) days after the Award Date, you will be deemed to have
accepted your Award on the terms and conditions set forth herein.
2
8. Effect of Termination of Service. Except as expressly provided in this Section 8, the Participant's Stock Units (as well as the related
Dividend Equivalent Rights) shall terminate to the extent such Stock Units have not become vested prior to the Participant's Termination of Service,
meaning the first date the Participant is no longer employed by or providing services to the Company or one of its Subsidiaries (the " Severance
Date"), regardless of the reason for the Participant's Termination of Service, whether with or without cause, voluntarily or involuntarily or whether
the Participant was employed or provided services for a portion of the vesting period prior to a Vesting Date. Notwithstanding the foregoing, in the
event the Participant's Termination of Service is due to the Participant's Disability at a time when Stock Units remain outstanding and unvested
under the Award, (a) the Award shall vest with respect to the number of Stock Units determined by multiplying (i) the number of then-outstanding
and unvested Stock Units subject to the Award that would have otherwise vested pursuant to Section 3 on the next Vesting Date following the
Severance Date but for such Termination of Service, by (ii) a fraction, the numerator of which shall be the number of days that have elapsed
between the Vesting Date that immediately preceded the Severance Date (or, in the case of a Termination of Service prior to the initial Vesting Date,
the Vesting Commencement Date) and the Severance Date, and the denominator of which shall be the number of days between the Vesting Date
that immediately preceded the Severance Date (or, in the case of a Termination of Service prior to the initial Vesting Date, the Vesting
Commencement Date) and the next Vesting Date following the Severance Date that would have occurred but for such Termination of Service; and
(b) any Stock Units (as well as the related Dividend Equivalent Rights) that are not vested after giving effect to the foregoing clause (a) shall
terminate on the Severance Date. Further, in the event the Participant's Termination of Service is due to the Participant's death, any then-
outstanding and unvested Stock Units subject to the Award shall be fully vested as of the Severance Date,
7. Timing and Manner of Payment of Stock Units. On or as soon as administratively practical following each vesting event pursuant
to Section 3 or Section 8 (and in all events not later than two and one-half (2 ½) months after such vesting event), the Company shall deliver to the
Participant a number of Shares (either by delivering one or more certificates for such Shares or by entering such Shares in book entry form, as
determined by the Company in its discretion) equal to the number of Stock Units subject to the Award that vest on the applicable Vesting Date, less
Tax-Related Items (as defined in Section 11 below), unless such Stock Units terminate prior to the given Vesting Date pursuant to Section 8. The
Company's obligation to deliver Shares or otherwise make payment with respect to vested Stock Units is subject to the condition precedent that the
Participant or other person entitled under the Plan to receive any Shares with respect to the vested Stock Units deliver to the Company any
representations or other documents or assurances required pursuant to Section 13(c) of the Plan. The Participant shall have no further rights with
respect to any Stock Units that are paid or that terminate pursuant to Section 8.
6. Restrictions on Transfer. Except as provided in Section 4(c) of the Plan, neither the Award, nor any interest therein or amount or
Shares payable in respect thereof may be sold, assigned, transferred, pledged or otherwise disposed of, alienated or encumbered, either voluntarily
or involuntarily.
Dividend Equivalent Rights Distributions. As of any date that the Company pays an ordinary cash dividend on its
Common Stock, the Company shall credit the Participant with a dollar amount equal to (i) the per share cash dividend paid by the Company on its
Common Stock on such date, multiplied by (ii) the total number of Stock Units (with such total number adjusted pursuant to Section 11 of the Plan)
subject to the Award that are outstanding immediately prior to the record date for that dividend (a “ Dividend Equivalent Right "). Any Dividend
Equivalent Rights credited pursuant to the foregoing provisions of this Section 5(b) shall be subject to the same vesting, payment and other terms,
conditions and restrictions as the original Stock Units to which they relate; provided, however, that the amount of any vested Dividend Equivalent
Rights shall be paid in cash. No crediting of Dividend Equivalent Rights shall be made pursuant to this Section 5(b) with respect to any Stock Units
which, immediately prior to the record date for that dividend, have either been paid pursuant to Section 7 or terminated pursuant to Section 8.
"
2
8. Effect of Termination of Service. Except as provided in the next sentence, the Participant's Stock Units (as well as the related
Dividend Equivalent Rights) shall terminate to the extent such Stock Units have not become vested prior to the Participant's Termination of Service,
meaning the first date the Participant is no longer employed by or providing services to the Company or one of its Subsidiaries (the " Severance
Date"), regardless of the reason for the Participant's Termination of Service, whether with or without cause, voluntarily or involuntarily or whether
the Participant was employed or provided services for a portion of the vesting period prior to a Vesting Date. In the event the Participant's
Severance Date is the result of the Participant's Termination of Service due to the Participant's death or Disability, and the Severance Date occurs
prior to the Vesting Date, on the Vesting Date the Award shall vest with respect to a number of Stock Units determined by multiplying (i) the Stock
Units subject to the Award that would have otherwise vested pursuant to the Award on such Vesting Date but for the Termination of Service and to
the extent the applicable performance-based vesting requirement is satisfied, by (ii) the Severance Fraction (determined as set forth below). Any
Stock Units that are unvested on the Severance Date and that are not eligible to vest on the Vesting Date following the Severance Date pursuant to
the preceding sentence shall terminate as of the
7. Timing and Manner of Payment of Stock Units. On or as soon as administratively practical following the vesting event pursuant to
Section 3 or Section 8 (and in all events not later than two and one-half (2 ½) months after such vesting event), the Company shall deliver to the
Participant a number of Shares (either by delivering one or more certificates for such Shares or by entering such Shares in book entry form, as
determined by the Company in its discretion) equal to the number of Stock Units subject to the Award that vest on the Vesting Date, less Tax-
Related Items (as defined in Section 11 below), unless such Stock Units terminate prior to the Vesting Date pursuant to Section 8. The Company's
obligation to deliver Shares or otherwise make payment with respect to vested Stock Units is subject to the condition precedent that the Participant
or other person entitled under the Plan to receive any Shares with respect to the vested Stock Units deliver to the Company any representations or
other documents or assurances required pursuant to Section 13(c) of the Plan. The Participant shall have no further rights with respect to any Stock
Units that are paid or that terminate pursuant to Section 8.
6. Restrictions on Transfer. Except as provided in Section 4(c) of the Plan, neither the Award, nor any interest therein or amount or
Shares payable in respect thereof may be sold, assigned, transferred, pledged or otherwise disposed of, alienated or encumbered, either voluntarily
or involuntarily.
(b) Dividend Equivalent Rights Distributions. As of any date that the Company pays an ordinary cash dividend on its
Common Stock, the Company shall credit the Participant with a dollar amount equal to (i) the per share cash dividend paid by the Company on its
Common Stock on such date, multiplied by (ii) the total target number of Stock Units (with such total number adjusted pursuant to Section 11 of the
Plan) subject to the Award that are outstanding immediately prior to the record date for that dividend (a" Dividend Equivalent Right "). Any
Dividend Equivalent Rights credited pursuant to the foregoing provisions of this Section 5(b) shall be subject to the same vesting, payment and other
terms, conditions and restrictions as the original Stock Units to which they relate; provided, however, that the amount of any vested Dividend
Equivalent Rights shall be paid in cash. For purposes of clarity, the percentage of the Dividend Equivalent Rights that are paid will correspond to the
percentage of the total target number of Stock Units that vest on the Vesting Date, after giving effect to Exhibit A. No crediting of Dividend
Equivalent Rights shall be made pursuant to this Section 5(b) with respect to any Stock Units which, immediately prior to the record date for that
dividend, have either been paid pursuant to Section 7 or terminated pursuant to Section 8 or Exhibit A.
Limitations on Rights Associated with Stock Units. The Participant shall have no rights as a shareholder of the
Company, no dividend rights (except as expressly provided in Section 5(b) with respect to Dividend Equivalent Rights) and no voting rights, with
respect to the Stock Units or any Shares underlying or issuable in respect of such Stock Units until such Shares are actually issued to and held of
record by the Participant. No adjustments will be made for dividends or other rights of a holder for which the record date is prior to the date of
issuance of the stock certificate or book entry evidencing such Shares.
(a)
Dividend and Voting Rights.
5.
17.
Limitation on the Participant's Rights. Participation in the Plan confers no rights or interests other than as herein provided. This
Award Agreement creates only a contractual obligation on the part of the Company as to amounts payable and shall not be construed as creating a
trust. Neither the Plan nor any underlying program, in and of itself, has any assets. The Participant shall have only the rights of a general unsecured
creditor of the Company with respect to amounts credited and benefits payable, if any, with respect to the Stock Units, and rights no greater than the
right to receive the Common Stock as a general unsecured creditor with respect to Stock Units, as and when payable hereunder.
Nothing contained in this Award Agreement or the Plan constitutes an employment or service commitment by the Company, affects the
Participant's status as an employee at will who is subject to termination with or without cause, confers upon the Participant any right to remain
employed by or in service to the Company or any Subsidiary, interferes in any way with the right of the Company or any Subsidiary at any time to
terminate such employment or services, or affects the right of the Company or any Subsidiary to increase or decrease the Participant's other
compensation or benefits. Nothing in this Section 4, however, is intended to adversely affect any independent contractual right of the Participant
without his or her consent thereto.
4. Continuance of Employment. Except as provided in this Section 4 and in Section 8 below, vesting of the Award requires continued
employment or service through the Vesting Date as a condition to the vesting of the Award and the rights and benefits under this Award Agreement.
Employment or service for only a portion of the vesting period, even if a substantial portion, will not entitle the Participant to any proportionate
vesting of the Award. For purposes of this Award Agreement, active service shall include (a) the duration of an approved leave of absence (other
than a personal leave of absence) and (b) the first thirty (30) days of an approved personal leave of absence, in each case as approved by the
Company, in its sole discretion. The vesting of the Award shall be tolled beginning on the thirty-first (31st) day of a personal leave of absence.
3. Vesting. Subject to Sections 4 and 8 below, the Award shall vest and become nonforfeitable as set forth in the Grant Notice and
Exhibit A hereto. (The vesting date set forth in the Grant Notice is referred to herein as a "Vesting Date").
2. Stock Units. As used herein, the term “ Stock Unit ” shall mean a non-voting unit of measurement which is deemed for bookkeeping
purposes to be equivalent to one outstanding share of the Company's Common Stock ("Share") solely for purposes of the Plan and this Award
Agreement. The Stock Units shall be used solely as a device for the determination of the payment to eventually be made to the Participant if such
Stock Units vest pursuant to this Award Agreement. The Stock Units shall not be treated as property or as a trust fund of any kind.
1. General. These Terms and Conditions of Restricted Stock Unit Award - Performance Award (these “ Terms ") apply to a particular
restricted stock unit award (the "Award ") granted by Apple Inc., a California corporation (the " Company "), and are incorporated by reference in
the Notice of Grant (the " Grant Notice ") corresponding to that particular grant. The recipient of the Award identified in the Grant Notice is referred
to as the "Participant." The effective date of grant of the Award as set forth in the Grant Notice is referred to as the "Award Date." The Award
was granted under and is subject to the provisions of the Apple Inc. 2014 Employee Stock Plan (the " Plan "). Capitalized terms are defined in the
Plan if not defined herein. The Award has been granted to the Participant in addition to, and not in lieu of, any other form of compensation otherwise
payable or to be paid to the Participant. The Grant Notice and these Terms (including Exhibit A hereto, incorporated herein by this reference) are
collectively referred to as the " Award Agreement" applicable to the Award.
"
PERFORMANCE AWARD
TERMS AND CONDITIONS OF RESTRICTED STOCK UNIT AWARD
RESTRICTED STOCK UNIT AWARD AGREEMENT
2014 EMPLOYEE STOCK PLAN
APPLE INC.
This restricted stock unit award (the "Award”) is granted under and governed by the terms and conditions of the Apple Inc. 2014 Employee
Stock Plan and the Terms and Conditions of Restricted Stock Unit Award - Performance Award (including Exhibit A thereto), which are incorporated
herein by reference.
Entire Agreement. This Award Agreement and the Plan together constitute the entire agreement and supersede all prior
understandings and agreements, written or oral, of the parties hereto with respect to the subject matter hereof. The Plan and this Award Agreement
may be amended pursuant to Section 15 of the Plan. Such amendment must be in writing and signed by the Company. The Company may,
however, unilaterally waive any provision hereof in writing to the extent such waiver does not adversely affect the interests of the Participant
hereunder, but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of any other provision
hereof.
Prior to the relevant taxable or tax withholding event, as applicable, the Participant shall pay or make arrangements satisfactory to
the Company and/or the Employer to satisfy all Tax-Related Items. In this regard, the Participant authorizes the Company and/or the Employer, or
their respective agents, at their discretion and pursuant to such procedures as they may specify from time to time, to satisfy any applicable
withholding obligations with regard to all Tax-Related Items by one or a combination of the following:
Plan. The Award and all rights of the Participant under this Award Agreement are subject to the terms and conditions of the
provisions of the Plan, incorporated herein by reference. The Participant agrees to be bound by the terms of the Plan and this Award Agreement.
The Participant acknowledges having read and understood the Plan, the Prospectus for the Plan, and this Award Agreement. Unless otherwise
expressly provided in other sections of this Award Agreement, provisions of the Plan that confer discretionary authority on the Board or the
Committee do not (and shall not be deemed to) create any rights in the Participant unless such rights are expressly set forth herein or are otherwise
in the sole discretion of the Board or the Committee so conferred by appropriate action of the Board or the Committee under the Plan after the date
hereof.
4. Continuance of Employment. Except as provided in this Section 4 and in Section 8 below, vesting of the Award requires continued
employment or service through each applicable Vesting Date as a condition to the vesting of the applicable installment of the Award and the rights
and benefits under this Award Agreement. Employment or service for only a portion of the period between the Vesting Commencement Date and
the first Vesting Date or between subsequent Vesting Dates, even if a substantial portion, will not entitle the Participant to any proportionate vesting
of the Award. For purposes of this Award Agreement, active service shall include (a) the duration of an approved leave of absence (other than a
personal leave of absence) and (b) the first thirty (30) days of an approved personal leave of absence, in each case as approved by the Company,
in its sole discretion. The vesting of the Award shall be tolled beginning on the thirty-first (31st) day of a personal leave of absence.
3. Vesting. Subject to Sections 4 and 8 below, the Award shall vest and become nonforfeitable as set forth in the Grant Notice. (Each
vesting date set forth in the Grant Notice is referred to herein as a "Vesting Date.")
2. Stock Units. As used herein, the term “ Stock Unit" shall mean a non-voting unit of measurement which is deemed for bookkeeping
purposes to be equivalent to one outstanding share of the Company's Common Stock (" Share ") solely for purposes of the Plan and this Award
Agreement. The Stock Units shall be used solely as a device for the determination of the payment to eventually be made to the Participant if such
Stock Units vest pursuant to this Award Agreement. The Stock Units shall not be treated as property or as a trust fund of any kind.
1. General. These Terms and Conditions of Restricted Stock Unit Award (these “Terms”) apply to a particular restricted stock unit
award (the "Award ") granted by Apple Inc., a California corporation (the “ Company "), and are incorporated by reference in the Notice of Grant
(the "Grant Notice ") corresponding to that particular grant. The recipient of the Award identified in the Grant Notice is referred to as the
Participant." The effective date of grant of the Award as set forth in the Grant Notice is referred to as the "Award Date." The Award was granted
under and is subject to the provisions of the Apple Inc. 2014 Employee Stock Plan (the " Plan "). Capitalized terms are defined in the Plan if not
defined herein. The Award has been granted to the Participant in addition to, and not in lieu of, any other form of compensation otherwise payable or
to be paid to the Participant. The Grant Notice and these Terms are collectively referred to as the "Award Agreement" applicable to the Award.
"
TERMS AND CONDITIONS OF RESTRICTED STOCK UNIT AWARD
RESTRICTED STOCK UNIT AWARD AGREEMENT
2014 EMPLOYEE STOCK PLAN
APPLE INC.
You do not have to accept the Award. If you wish to decline your Award, you should promptly notify Apple Inc.'s Stock Plan Group of your
decision at stock@apple.com. If you do not provide such notification within thirty (30) days after the Award Date, you will be deemed to have
accepted your Award on the terms and conditions set forth herein.
This restricted stock unit award (the "Award") is granted under and governed by the terms and conditions of the Apple Inc. 2014 Employee
Stock Plan and the Terms and Conditions of Restricted Stock Unit Award, which are incorporated herein by reference.
Exhibit 10.20
Vesting Schedule:
(the "Vesting Commencement Date")
Vesting Commencement Date:
9. Recoupment. Notwithstanding any other provision herein, the Award and any Shares or other amount or property that may be
issued, delivered or paid in respect of the Award, as well as any consideration that may be received in respect of a sale or other disposition of any
such Shares or property, shall be subject to any recoupment, “clawback" or similar provisions of applicable law, as well as any recoupment or
"clawback" policies of the Company that may be in effect from time to time. In addition, the Company may require the Participant to deliver or
otherwise repay to the Company the Award and any Shares or other amount or property that may be issued, delivered or paid in respect of the
Award, as well as any consideration that may be received in respect of a sale or other disposition of any such Shares or property, if the Company
reasonably determines that one or more of the following has occurred:
(the "Award Date")
Award Date:
NOTICE OF GRANT
RESTRICTED STOCK UNIT AWARD AGREEMENT
2014 EMPLOYEE STOCK PLAN
APPLE INC.
No. of Units Subject to Award:
(the "Participant")
Grant Number:
Employee ID:
(a)
Nothing contained in this Award Agreement or the Plan constitutes an employment or service commitment by the Company, affects the
Participant's status as an employee at will who is subject to termination with or without cause, confers upon the Participant any right to remain
employed by or in service to the Company or any Subsidiary, interferes in any way with the right of the Company or any Subsidiary at any time to
terminate such employment or services, or affects the right of the Company or any Subsidiary to increase or decrease the Participant's other
compensation or benefits. Nothing in this Section 4, however, is intended to adversely affect any independent contractual right of the Participant
without his or her consent thereto.
16.
5.
(a)
15.
14. Notices. Any notice to be given under the terms of this Award Agreement shall be in writing and addressed to the Company at its
principal office to the attention of the Secretary, and to the Participant at the Participant's last address reflected on the Company's records, or at
such other address as either party may hereafter designate in writing to the other. Any such notice shall be given only when received, but if the
Participant is no longer an employee of the Company, shall be deemed to have been duly given by the Company when enclosed in a properly
sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or
branch post office regularly maintained by the United States Government.
13.
Data Privacy. The Participant acknowledges and consents to the collection, use, processing and transfer of personal data as
described in this Section 13. The Company, its related entities, and the Employer hold certain personal information about the Participant, including
the Participant's name, home address and telephone number, date of birth, social security number or other employee identification number, salary,
nationality, job title, any Shares or directorships held in the Company, details of all options or any other entitlement to Shares awarded, canceled,
purchased, vested, unvested or outstanding in the Participant's favor, for the purpose of managing and administering the Plan (“ Data”). The
Company and its related entities may transfer Data amongst themselves as necessary for the purpose of implementation, administration and
management of the Participant's participation in the Plan, and the Company and its related entities may each further transfer Data to any third
parties assisting the Company or any such related entity in the implementation, administration and management of the Plan. The Participant
acknowledges that the transferors and transferees of such Data may be located anywhere in the world and hereby authorizes each of them to
receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the
Participant's participation in the Plan, including any transfer of such Data as may be required for the administration of the Plan and/or the
subsequent holding of Shares on the Participant's behalf to a broker or to other third party with whom the Participant may elect to deposit any
Shares acquired under the Plan (whether pursuant to the Award or otherwise).
4
Electronic Delivery and Acceptance. The Company may, in its sole discretion, deliver any documents related to the Award by
electronic means or request the Participant's consent to participate in the Plan by electronic means. The Participant hereby consents to receive all
applicable documentation by electronic delivery and to participate in the Plan through an on-line (and/or voice activated) system established and
maintained by the Company or a third party vendor designated by the Company.
12.
Depending on the withholding method, the Company may withhold or account for Tax-Related Items by considering applicable minimum
statutory withholding amounts or other applicable withholding rates, including maximum applicable rates. If the maximum rate is used, any over-
withheld amount will be refunded to the Participant in cash by the Company or Employer (with no entitlement to the Common Stock equivalent) or if
not refunded, the Participant may seek a refund from the local tax authorities. If the obligation for Tax-Related Items is satisfied by withholding a
number of Shares as described herein, for tax purposes, the Participant is deemed to have been issued the full number of Shares subject to the
vested Stock Units, notwithstanding that a number of the Shares are held back solely for the purpose of paying the Tax-Related Items. The
Participant shall pay to the Company and/or the Employer any amount of Tax-Related Items that the Company and/or the Employer may be required
to withhold or account for as a result of the Participant's participation in the Plan that cannot be satisfied by the means previously described. The
Company may refuse to issue or deliver to the Participant any Shares or the proceeds of the sale of Shares if the Participant fails to comply with the
Participant's obligations in connection with the Tax-Related Items.
Notwithstanding the foregoing, if the Participant is an officer of the Company who is subject to Section 16 of the Exchange Act, then
the Company must satisfy any withholding obligations arising upon the occurrence of a taxable or tax withholding event, as applicable,
by withholding Shares otherwise deliverable or an amount otherwise payable upon settlement of Dividend Equivalent Rights pursuant to
method (b), unless the Board or the Committee determines in its discretion to satisfy the obligation for Tax-Related Items by one or a
combination of methods (a), (b), (c), and (d) above.
(d) withholding from the proceeds of the sale of Shares acquired upon vesting/settlement of the Award.
(c) arranging for the sale of Shares otherwise deliverable to the Participant (on the Participant's behalf and at the Participant's
direction pursuant to this authorization), including selling Shares as part of a block trade with other Participants in the Plan; or
withholding from any wages or other cash compensation payable to the Participant by the Company and/or the Employer;
(b) withholding otherwise deliverable Shares and/or from otherwise payable Dividend Equivalent Rights to be issued or paid upon
vesting/settlement of the Award;
(a)
3
Responsibility for Taxes. The Participant acknowledges that, regardless of any action the Company and/or the Participant's
employer (the " Employer ") take with respect to any or all income tax (including U.S. federal, state and local tax and/or non-U.S. tax), social
insurance, payroll tax, payment on account or other tax-related items related to the Participant's participation in the Plan and legally applicable to the
Participant or deemed by the Company or the Employer to be an appropriate charge to the Participant even if technically due by the Company or the
Employer ("Tax-Related Items"), the ultimate liability for all Tax-Related Items is and remains the Participant's responsibility and may exceed the
amount actually withheld by the Company or the Employer. The Participant further acknowledges that the Company and/or the Employer (i) make
no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant
of the Stock Units, the vesting of the Stock Units, the delivery of Shares, the subsequent sale of any Shares acquired at vesting and the receipt of
any dividends and/or Dividend Equivalent Rights; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any
aspect of the Award to reduce or eliminate the Participant's liability for Tax-Related Items or achieve any particular tax result. Further, if the
Participant is or becomes subject to tax in more than one jurisdiction, the Participant acknowledges that the Company and/or the Employer (or
former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
11.
Adjustments Upon Specified Events Upon the occurrence of certain events relating to the Company's stock contemplated by
Section 11 of the Plan (including, without limitation, an extraordinary cash dividend on such stock), the Committee shall make adjustments in
accordance with such section in the number of Stock Units then outstanding and the number and kind of securities that may be issued in respect of
the Award. No such adjustment shall be made with respect to any ordinary cash dividend for which Dividend Equivalent Rights are credited pursuant
to Section 5(b).
during the Employment Period or at any time thereafter, the Participant has committed or engaged in an act of theft, embezzlement
or fraud, or materially breached any agreement to which the Participant is a party with the Company or any of its Subsidiaries.
during the Employment Period or at any time thereafter, the Participant has committed or engaged in a breach of confidentiality, or
an unauthorized disclosure or use of inside information, customer lists, trade secrets or other confidential information of the
Company or any of its Subsidiaries;
during the period of the Participant's employment or service with the Company or any of its Subsidiaries (the " Employment Period
"), the Participant has committed a felony (under the laws of the United States or any relevant state, or a similar crime or offense
under the applicable laws of any relevant foreign jurisdiction);
10.
(c)
(b)
Name:
(b)
underlying or issuable in respect of such Stock Units until such Shares are actually issued to and held of record by the Participant. No adjustments
will be made for dividends or other rights of a holder for which the record date is prior to the date of issuance of the stock certificate or book entry
evidencing such Shares.
1
Limitations on Rights Associated with Stock Units. The Participant shall have no rights as a shareholder of the
Company, no dividend rights (except as expressly provided in Section 5(b) with respect to Dividend Equivalent Rights) and no voting rights, with
respect to the Stock Units or any Shares
Dividend and Voting Rights.
and any Dividend Equivalent Rights credited to the Participant shall be paid. If any unvested Stock Units are terminated hereunder, such Stock Units
(as well as the related Dividend Equivalent Rights) shall automatically terminate and be cancelled as of the applicable Severance Date without
payment of any consideration by the Company and without any other action by the Participant or the Participant's personal representative, as the
case may be.
136
53,483
income taxes
Earnings before provision for
Earnings:
September 28, 2013
September 27, 2014
Years ended
September 26, 2015
September 24, 2016
September 30, 2017
Exhibit 12.1
(In millions, except ratios)
Computation of Ratio of Earnings to Fixed Charges
Apple Inc.
A-3
*****
In the event of any ambiguity or discrepancy, the determination of the Committee shall be final and binding.
A-2
With respect to the computation of TSR, Beginning Price, and Ending Price, there shall also be an equitable and proportionate adjustment
to the extent (if any) necessary to preserve the intended incentives of the awards and mitigate the impact of any stock split, stock dividend or
reverse stock split occurring during the Performance Period (or during the applicable 20-day period in determining Beginning Price or Ending Price,
as the case may be).
Ending Price" means, with respect to the Company and any other Comparison Group member, the average of the closing
market prices of such company's common stock on the principal exchange on which such stock is traded for the twenty (20)
consecutive trading days ending on the last trading day of the Performance Period. For the purpose of determining Ending Price,
the value of dividends and other distributions shall be determined by treating them as reinvested in additional shares of stock at the
closing market price on the date of distribution.
* Beginning Price " means, with respect to the Company and any other Comparison Group member, the average of the closing
market prices of such company's common stock on the principal exchange on which such stock is traded for the twenty (20)
consecutive trading days beginning with the first trading day of the Performance Period. For the purpose of determining Beginning
Price, the value of dividends and other distributions shall be determined by treating them as reinvested in additional shares of stock
at the closing market price on the date of distribution.
66
TSR" shall be determined with respect to the Company and any other Comparison Group member by dividing: (a) the sum of (i)
the difference obtained by subtracting the applicable Beginning Price from the applicable Ending Price plus (ii) all dividends and
other distributions during the Performance Period by (b) the applicable Beginning Price. Any non-cash distributions shall be valued
at fair market value. For the purpose of determining TSR, the value of dividends and other distributions shall be determined by
treating them as reinvested in additional shares of stock at the closing market price on the date of distribution.
exchange on the last trading day of the Performance Period. In the event of a formation of a new parent company by a Comparison
Group member, substantially all of the assets and liabilities of which consist immediately after the transaction of the equity interests
in the original Comparison Group member or the assets and liabilities of such Comparison Group member immediately prior to the
transaction, such new parent company shall be substituted for the Comparison Group member to the extent (and for such period of
time) as its common stock (or similar equity securities) are listed or traded on a national securities exchange but the common stock
(or similar equity securities) of the original Comparison Group member are not. In the event of a merger or other business
combination of two Comparison Group members (including, without limitation, the acquisition of one Comparison Group member, or
all or substantially all of its assets, by another Comparison Group member), the surviving, resulting or successor entity, as the case
may be, shall continue to be treated as a member of the Comparison Group, provided that the common stock (or similar equity
security) of such entity is listed or traded on a national securities exchange through the last trading day of the Performance Period.
With respect to the preceding two sentences, the applicable stock prices shall be equitably and proportionately adjusted to the
extent (if any) necessary to preserve the intended incentives of the awards and mitigate the impact of the transaction.
•
•
A-1
Comparison Group " means the Company and each other company included in the Standard & Poor's 500 index on the first day
of the Performance Period and, except as provided below, the common stock (or similar equity security) of which continues to be
listed or traded on a national securities exchange through the last trading day of the Performance Period. In the event a member of
the Comparison Group files for bankruptcy or liquidates due to an insolvency, such company shall continue to be treated as a
Comparison Group member, and such company's Ending Price will be treated as $0 if the common stock (or similar equity security)
of such company is no longer listed or traded on a national securities
66
$
Add: Fixed Charges
Total Earnings
$
159
188
215
expense
Interest component of rental
$
384
$
733
1,456
2,323 $
$
Interest Expense
TSR Percentile " means the percentile ranking of the Company's TSR among the TSRs for the Comparison Group members for
the Performance Period. In determining the Company's TSR Percentile for the Performance Period, in the event that the
Company's TSR for the Performance Period is equal to the TSR(s) of one or more other Comparison Group members for that same
period, the Company's TSR Percentile ranking will be determined by ranking the Company's TSR for that period as being greater
than such other Comparison Group members.
Fixed Charges (1):
$
54,010
$
73,407
527
892
$
$
72,515
$
61,372
1,644
63,016 $
$
64,089
2,538
66,627 $
50,155
265
50,420
•
66
For purposes of the Award, the following definitions will apply:
15. Plan The Award and all rights of the Participant under this Award Agreement are subject to the terms and conditions of the
provisions of the Plan, incorporated herein by reference. The Participant agrees to be bound by the terms of the Plan and this Award Agreement.
The Participant acknowledges having read and understood the Plan, the Prospectus for the Plan, and this Award Agreement. Unless otherwise
expressly provided in other sections of this Award Agreement, provisions of the Plan that confer discretionary authority on the Board or the
Committee do not (and shall not be deemed to) create any rights in the Participant unless such rights are expressly set forth herein or are otherwise
in the sole discretion of the Board or the Committee so conferred by appropriate action of the Board or the Committee under the Plan after the date
hereof.
Notices. Any notice to be given under the terms of this Award Agreement shall be in writing and addressed to the Company at its
principal office to the attention of the Secretary, and to the Participant at the Participant's last address reflected on the Company's records, or at
such other address as either party may hereafter designate in writing to the other. Any such notice shall be given only when received, but if the
Participant is no longer an employee of the Company, shall be deemed to have been duly given by the Company when enclosed in a properly
sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or
branch post office regularly maintained by the United States Government.
14.
13. Data Privacy. The Participant acknowledges and consents to the collection, use, processing and transfer of personal data as
described in this Section 13. The Company, its related entities, and the Employer hold certain personal information about the Participant, including
the Participant's name, home address and telephone number, date of birth, social security number or other employee identification number, salary,
nationality, job title, any Shares or directorships held in the Company, details of all options or any other entitlement to Shares awarded, canceled,
purchased, vested, unvested or outstanding in the Participant's favor, for the purpose of managing and administering the Plan (“ Data”). The
Company and its related entities may transfer Data amongst themselves as necessary for the purpose of implementation, administration and
management of the Participant's participation in the Plan, and the Company and its related entities may each further transfer Data to any third
parties assisting the Company or any such related entity in the implementation, administration and management of the Plan. The Participant
acknowledges that the transferors and transferees of such Data may be located anywhere in the world and hereby authorizes each of them to
receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the
Participant's participation in the Plan, including any transfer of such Data as may be required for the administration of the Plan and/or the
subsequent holding of Shares on the Participant's behalf to a broker or to other third party with whom the Participant may elect to deposit any
Shares acquired under the Plan (whether pursuant to the Award or otherwise).
Electronic Delivery and Acceptance. The Company may, in its sole discretion, deliver any documents related to the Award by
electronic means or request the Participant's consent to participate in the Plan by electronic means. The Participant hereby consents to receive all
applicable documentation by electronic delivery and to participate in the Plan through an on-line (and/or voice activated) system established and
maintained by the Company or a third party vendor designated by the Company.
12.
4
Depending on the withholding method, the Company may withhold or account for Tax-Related Items by considering applicable minimum
statutory withholding amounts or other applicable withholding rates, including maximum applicable rates. If the maximum rate is used, any over-
withheld amount will be refunded to the Participant in cash by the Company or Employer (with no entitlement to the Common Stock equivalent) or if
not refunded, the Participant may seek a refund from the local tax authorities. If the obligation for Tax-Related Items is satisfied by withholding a
number of Shares as described herein, for tax purposes, the Participant is deemed to have been issued the full number of Shares subject to the
vested Stock Units, notwithstanding that a number of the Shares are held back solely for the purpose of paying the Tax-Related Items. The
Participant shall pay to the Company and/or the Employer any amount of Tax-Related Items that the Company and/or the Employer may be required
to withhold or account for as a result of the Participant's participation in the Plan that cannot be satisfied by the means previously described. The
Company may refuse to issue or deliver to the Participant any Shares or the proceeds of the sale of Shares if the Participant fails to comply with the
Participant's obligations in connection with the Tax-Related Items.
Notwithstanding the foregoing, if the Participant is an officer of the Company who is subject to Section 16 of the Exchange Act, then
the Company must satisfy any withholding obligations arising upon the occurrence of a taxable or tax withholding event, as applicable,
by withholding Shares otherwise deliverable or an amount otherwise payable upon settlement of Dividend Equivalent Rights pursuant to
method (b), unless the Board or the Committee determines in its discretion to satisfy the obligation for Tax-Related Items by one or a
combination of methods (a), (b), (c), and (d) above.
(d) withholding from the proceeds of the sale of Shares acquired upon vesting/settlement of the Award.
(c) arranging for the sale of Shares otherwise deliverable to the Participant (on the Participant's behalf and at the Participant's
direction pursuant to this authorization), including selling Shares as part of a block trade with other Participants in the Plan; or
(b) withholding otherwise deliverable Shares and/or from otherwise payable Dividend Equivalent Rights to be issued or paid upon
vesting/settlement of the Award;
withholding from any wages or other cash compensation payable to the Participant by the Company and/or the Employer;
16.
(a)
terms of the grant or any aspect of the Award to reduce or eliminate the Participant's liability for Tax-Related Items or achieve any particular tax
result. Further, if the Participant is or becomes subject to tax in more than one jurisdiction, the Participant acknowledges that the Company and/or
the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
3
Responsibility for Taxes. The Participant acknowledges that, regardless of any action the Company and/or the Participant's
employer (the " Employer ”) take with respect to any or all income tax (including U.S. federal, state and local tax and/or non-U.S. tax), social
insurance, payroll tax, payment on account or other tax-related items related to the Participant's participation in the Plan and legally applicable to the
Participant or deemed by the Company or the Employer to be an appropriate charge to the Participant even if technically due by the Company or the
Employer ("Tax-Related Items"), the ultimate liability for all Tax-Related Items is and remains the Participant's responsibility and may exceed the
amount actually withheld by the Company or the Employer. The Participant further acknowledges that the Company and/or the Employer (i) make
no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant
of the Stock Units, the vesting of the Stock Units, the delivery of Shares, the subsequent sale of any Shares acquired at vesting and the receipt of
any dividends and/or Dividend Equivalent Rights; and (ii) do not commit to and are under no obligation to structure the
11.
10.
Adjustments Upon Specified Events. Upon the occurrence of certain events relating to the Company's stock contemplated by
Section 11 of the Plan (including, without limitation, an extraordinary cash dividend on such stock), the Committee shall make adjustments in
accordance with such section in the number of Stock Units then outstanding and the number and kind of securities that may be issued in respect of
the Award. No such adjustment shall be made with respect to any ordinary cash dividend for which Dividend Equivalent Rights are credited pursuant
to Section 5(b).
during the Employment Period or at any time thereafter, the Participant has committed or engaged in an act of theft, embezzlement
or fraud, or materially breached any agreement to which the Participant is a party with the Company or any of its Subsidiaries.
during the Employment Period or at any time thereafter, the Participant has committed or engaged in a breach of confidentiality, or
an unauthorized disclosure or use of inside information, customer lists, trade secrets or other confidential information of the
Company or any of its Subsidiaries;
during the period of the Participant's employment or service with the Company or any of its Subsidiaries (the “ Employment Period
"), the Participant has committed a felony (under the laws of the United States or any relevant state, or a similar crime or offense
under the applicable laws of any relevant foreign jurisdiction);
(c)
(b)
(a)
9. Recoupment. Notwithstanding any other provision herein, the Award and any Shares or other amount or property that may be
issued, delivered or paid in respect of the Award, as well as any consideration that may be received in respect of a sale or other disposition of any
such Shares or property, shall be subject to any recoupment, “clawback" or similar provisions of applicable law, as well as any recoupment or
"clawback" policies of the Company that may be in effect from time to time. In addition, the Company may require the Participant to deliver or
otherwise repay to the Company the Award and any Shares or other amount or property that may be issued, delivered or paid in respect of the
Award, as well as any consideration that may be received in respect of a sale or other disposition of any such Shares or property, if the Company
reasonably determines that one or more of the following has occurred:
Severance Date, and any Stock Units that remain outstanding and unvested after giving effect to the preceding sentence shall terminate as of the
Vesting Date. The " Severance Fraction" means a fraction, the numerator of which shall be determined by subtracting the number of days
remaining in the Performance Period on the Severance Date from the total number of days in the Performance Period, and the denominator of
which shall be the total number of days in the Performance Period. If any unvested Stock Units are terminated pursuant to this Award Agreement,
such Stock Units (as well as the related Dividend Equivalent Rights) shall automatically terminate and be cancelled as of the applicable Severance
Date (or, to the extent the applicable performance-based vesting conditions are not satisfied, the Vesting Date, as provided in Exhibit A) without
payment of any consideration by the Company and without any other action by the Participant, or the Participant's beneficiary or personal
representative, as the case may be.
Prior to the relevant taxable or tax withholding event, as applicable, the Participant shall pay or make arrangements satisfactory to
the Company and/or the Employer to satisfy all Tax-Related Items. In this regard, the Participant authorizes the Company and/or the Employer, or
their respective agents, at their discretion and pursuant to such procedures as they may specify from time to time, to satisfy any applicable
withholding obligations with regard to all Tax-Related Items by one or a combination of the following:
143
Entire Agreement. This Award Agreement and the Plan together constitute the entire agreement and supersede all prior
understandings and agreements, written or oral, of the parties hereto with respect to the subject matter hereof. The Plan and this Award Agreement
may be amended pursuant to Section 15 of the Plan. Such amendment must be in writing and signed by the Company. The Company may,
however, unilaterally waive any provision hereof in writing to the extent such waiver does not adversely affect the interests of the Participant
hereunder, but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of any other provision
hereof.
17.
The number of Stock Units that vest on the Vesting Date will be rounded to the nearest whole unit, and the balance of the Stock Units will
not vest and will terminate on that Vesting Date.
Notwithstanding the foregoing, if the Company's TSR for the Performance Period is negative, in no event shall more than one hundred
percent (100%) of the target Stock Units vest.
For TSR Percentile performance for the Performance Period between the levels indicated above, the portion of the Stock Units that will vest
on the Vesting Date will be determined on a straight-line basis ( i.e., linearly interpolated) between the two nearest vesting percentages indicated
above.
If the Company's TSR Percentile for the Performance Period is below the ( ) (( )) percentile, ( ) (( ) %) of the Stock Units will vest on
the Vesting Date.
If the Company's TSR Percentile for the Performance Period is at the ( ) (( )) percentile, ( ) (( ) %) of the target Stock Units will vest
on the Vesting Date.
If the Company's TSR Percentile for the Performance Period is at the ( ) (( )) percentile, ( ) ([ ] %) of the target Stock Units will vest
on the Vesting Date.
If the Company's TSR Percentile for the Performance Period is at the ( ) (( )) percentile or greater, ( ) ([ ]%) of the target Stock Units
will vest on the Vesting Date.
•
•
•
•
The percentage of the Stock Units (and related Dividend Equivalent Rights) that vest on the Vesting Date will be determined as follows:
The Stock Units (and related Dividend Equivalent Rights) subject to the Award that will vest on the Vesting Date will be determined based
on the Company's relative total shareholder return (" TSR ") Percentile for the Performance Period.
5
PERFORMANCE VESTING REQUIREMENTS
PERFORMANCE AWARD
6
Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Participant's
participation in the Plan, on the Stock Units and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or
advisable for legal or administrative reasons, and to require the Participant to sign any additional agreements or undertakings that may be
necessary to accomplish the foregoing.
24.
Severability. The provisions of this Award Agreement are severable and if any one of more provisions are determined to be illegal
or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
23.
Construction. It is intended that the terms of the Award will not result in the imposition of any tax liability pursuant to Section 409A
of the Code. This Award Agreement shall be construed and interpreted consistent with that intent.
22.
21. Choice of Venue. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties
evidenced by this grant or this Award Agreement, the parties hereby submit to the exclusive jurisdiction of the State of California and agree that
such litigation shall be conducted only in the courts of Santa Clara County, California, or the federal courts for the Northern District of California, and
no other courts, where this grant is made and/or to be performed.
20. Governing Law. This Award Agreement shall be governed by and construed and enforced in accordance with the laws of the State
of California without regard to conflict of law principles thereunder.
19. Section Headings. The section headings of this Award Agreement are for convenience of reference only and shall not be deemed
to alter or affect any provision hereof.
18. Counterparts. This Award Agreement may be executed simultaneously in any number of counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same instrument.
Limitation on the Participant's Rights. Participation in the Plan confers no rights or interests other than as herein provided. This
Award Agreement creates only a contractual obligation on the part of the Company as to amounts payable and shall not be construed as creating a
trust. Neither the Plan nor any underlying program, in and of itself, has any assets. The Participant shall have only the rights of a general unsecured
creditor of the Company with respect to amounts credited and benefits payable, if any, with respect to the Stock Units, and rights no greater than the
right to receive the Common Stock as a general unsecured creditor with respect to Stock Units, as and when payable hereunder.
EXHIBIT A
129
$
$
China
Ireland
Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Apple Inc. are omitted because, considered in the aggregate, they would not
constitute a significant subsidiary as of the end of the year covered by this report.
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1)
(2)
G A T N E §
(3)
(4)
Registration Statement (Form S-8 No. 333-203698) pertaining to Apple Inc. Employee Stock Purchase Plan,
Registration Statement (Form S-8 No. 333-195509) pertaining to Apple Inc. 2014 Employee Stock Plan,
Registration Statement (Form S-8 No. 333-193709) pertaining to Topsy Labs, Inc. 2007 Stock Plan,
Registration Statement (Form S-8 No. 333-184706) pertaining to AuthenTec, Inc. 2007 Stock Incentive Plan and AuthenTec, Inc. 2010 Incentive Plan,
as amended,
Registration Statement (Form S-8 No. 333-180981) pertaining to Chomp Inc. 2009 Equity Incentive Plan,
Ireland
Registration Statement (Form S-8 No. 333-165214) pertaining to Apple Inc. 2003 Employee Stock Plan, la la media, inc. 2005 Stock Plan and Quattro
Wireless, Inc. 2006 Stock Option and Grant Plan,
(6)
(7)
Registration Statement (Form S-8 No. 333-179189) pertaining to Anobit Technologies Ltd. Global Share Incentive Plan (2006),
(8)
(9)
(10)
(11)
Registration Statement (Form S-8 No. 333-146026) pertaining to Apple Inc. 2003 Employee Stock Plan and Apple Inc. Amended Employee Stock
Purchase Plan,
Registration Statement (Form S-8 No. 333-125148) pertaining to Employee Stock Purchase Plan and 2003 Employee Stock Plan, and
Registration Statement (Form S-8 No. 333-60455) pertaining to 1997 Director Stock Option Plan;
of our reports dated November 3, 2017 with respect to the consolidated financial statements of Apple Inc., and the effectiveness of internal control over financial
reporting of Apple Inc., included in this Annual Report on Form 10-K for the year ended September 30, 2017.
San Jose, California
November 3, 2017
/s/ Ernst & Young LLP
Total Fixed Charges
(5)
Nevada, U.S.
Registration Statement (Form S-3 ASR No. 333-210983) of Apple Inc.,
Ireland
2,538 $
Ireland
$
892
$
527
$
265
Ratio of Earnings to Fixed Charges (2)
26
38
82
88
(1) Fixed charges include the portion of rental expense that management believes is representative of the interest component.
(2) The ratio of earnings to fixed charges is computed by dividing Total Earnings by Total Fixed Charges.
102
1,644
Subsidiaries of
Apple Inc.*
Ireland
190
Apple Computer Trading (Shanghai) Co., Ltd.
Apple Operations
Braeburn Capital, Inc.
Apple Operations Europe
Apple Distribution International
Apple Sales International
of Incorporation
Jurisdiction
Exhibit 21.1
Apple Operations International
2.
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: November 3, 2017
By: /s/ Timothy D. Cook
Chief Executive Officer
I, Luca Maestri, certify that:
1.
I have reviewed this annual report on Form 10-K of Apple Inc.;
The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
Exhibit 31.2
CERTIFICATION
Timothy D. Cook
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting; and
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Registrant and have:
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
5.
4.
3.
2.
Exhibit 31.1
CERTIFICATION
I have reviewed this annual report on Form 10-K of Apple Inc.;
1.
I, Timothy D. Cook, certify that:
3.
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
4.
Exhibit 32.1
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
A signed original of this written statement required by Section 906 has been provided to Apple Inc. and will be retained by Apple Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
5.
Luca Maestri
By: /s/ Luca Maestri
Date: November 3, 2017
I, Luca Maestri, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Annual Report of Apple Inc. on Form 10-K for the fiscal year ended September 30, 2017 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of
operations of Apple Inc. at the dates and for the periods indicated.
Chief Executive Officer
By: /s/ Timothy D. Cook
Timothy D. Cook
Date: November 3, 2017
I, Timothy D. Cook, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Annual Report of Apple Inc. on Form 10-K for the fiscal year ended September 30, 2017 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results
of operations of Apple Inc. at the dates and for the periods indicated.
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
AS ADOPTED PURSUANT TO
18 U.S.C. SECTION 1350,
PURSUANT TO
Senior Vice President,
Chief Financial Officer
Senior Vice President,
Chief Financial Officer
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting; and
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: November 3, 2017
By: /s/ Luca Maestri
Luca Maestri
The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
With respect to iOS devices, the Company relies on the continued availability and development of compelling and innovative software applications, including
applications distributed through the App Store. iOS devices are subject to rapid technological change, and, if third-party developers are unable to or choose not
to keep up with this pace of change, third-party applications might not successfully operate and may result in dissatisfied customers. As with applications for the
Company's Mac products, the availability and development of these applications also depend on developers' perceptions and analysis of the relative benefits of
developing, maintaining or upgrading software for the Company's iOS devices rather than its competitors' platforms, such as Android. If developers focus their
efforts on these competing platforms, the availability and quality of applications for the Company's iOS devices may suffer.
With respect to its Mac products, the Company believes the availability of third-party software applications and services depends in part on the developers'
perception and analysis of the relative benefits of developing, maintaining and upgrading such software for the Company's products compared to Windows-
based products. This analysis may be based on factors such as the market position of the Company and its products, the anticipated revenue that may be
generated, expected future growth of Mac sales and the costs of developing such applications and services. If the Company's minority share of the global
personal computer market causes developers to question the Mac's prospects, developers could be less inclined to develop or upgrade software for the
Company's Mac products and more inclined to devote their resources to developing and upgrading software for the larger Windows market.
The Company believes decisions by customers to purchase its hardware products depend in part on the availability of third-party software applications and
services. There is no assurance that third-party developers will continue to develop and maintain software applications and services for the Company's products.
If third-party software applications and services cease to be developed and maintained for the Company's products, customers may choose not to buy the
Company's products.
The Company's future performance depends in part on support from third-party software developers.
The Company relies on access to third-party digital content, which may not be available to the Company on commercially reasonable terms or at all.
The Company contracts with numerous third parties to offer their digital content to customers. This includes the right to sell currently available music, movies, TV
shows and books. The licensing or other distribution arrangements with these third parties are for relatively short terms and do not guarantee the continuation or
renewal of these arrangements on reasonable terms, if at all. Some third-party content providers and distributors currently or in the future may offer competing
products and services, and could take action to make it more difficult or impossible for the Company to license or otherwise distribute their content in the future.
Other content owners, providers or distributors may seek to limit the Company's access to, or increase the cost of, such content. The Company may be unable
to continue to offer a wide variety of content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach. Failure to obtain the
right to make third-party digital content available, or to make such content available on commercially reasonable terms, could have a material adverse impact on
the Company's financial condition and operating results.
The Company sells complex hardware and software products and services that can contain design and manufacturing defects. Sophisticated operating system
software and applications, such as those sold by the Company, often contain "bugs" that can unexpectedly interfere with the software's intended operation. The
Company's online services may from time to time experience outages, service slowdowns or errors. Defects may also occur in components and products the
Company purchases from third parties. There can be no assurance the Company will be able to detect and fix all defects in the hardware, software and services
it sells. Failure to do so could result in lost revenue, significant warranty and other expenses and harm to the Company's reputation.
The Company's products and services may experience quality problems from time to time that can result in decreased sales and operating margin
and harm to the Company's reputation.
Apple Inc. | 2017 Form 10-K | 10
Apple Inc. | 2017 Form 10-K | 11
Some third-party digital content providers require the Company to provide digital rights management and other security solutions. If requirements change, the
Company may have to develop or license new technology to provide these solutions. There is no assurance the Company will be able to develop or license such
solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation that would force the
Company to license its digital rights management, which could lessen the protection of content and subject it to piracy and also could negatively affect
arrangements with the Company's content providers.
The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable terms or
at all.
While the Company maintains insurance coverage for certain types of claims, such insurance coverage may be insufficient to cover all losses or all types of
claims that may arise.
The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights.
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and have not yet been fully resolved, and
new claims may arise in the future. In addition, agreements entered into by the Company sometimes include indemnification provisions which may subject the
Company to costs and damages in the event of a claim against an indemnified third party.
Claims against the Company based on allegations of patent infringement or other violations of intellectual property rights have generally increased over time and
may continue to increase. In particular, the Company has historically faced a significant number of patent claims relating to its cellular-enabled products, and
new claims may arise in the future. For example, technology and other patent-holding companies frequently assert their patents and seek royalties and often
enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. The Company is vigorously defending
infringement actions in courts in a number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally in various
countries. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to the Company's operations and distracting to
management. In recognition of these considerations, the Company may enter into licensing agreements or other arrangements to settle litigation and resolve
such disputes. No assurance can be given that such agreements can be obtained on acceptable terms or that litigation will not occur. These agreements may
also significantly increase the Company's operating expenses.
In management's opinion, there is not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a
recorded accrual, with respect to loss contingencies, including matters related to infringement of intellectual property rights. However, the outcome of litigation is
inherently uncertain.
Although management considers the likelihood of such an outcome to be remote, if one or more legal matters were resolved against the Company or an
indemnified third party in a reporting period for amounts in excess of management's expectations, the Company's consolidated financial statements for that
reporting period could be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary
damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against the Company that could materially adversely affect its
financial condition and operating results.
The Company is subject to laws and regulations worldwide, changes to which could increase the Company's costs and individually or in the
aggregate adversely affect the Company's business.
The Company is subject to laws and regulations affecting its domestic and international operations in a number of areas. These U.S. and foreign laws and
regulations affect the Company's activities including, but not limited to, in areas of labor, advertising, digital content, consumer protection, real estate, billing, e-
commerce, promotions, quality of services, telecommunications, mobile communications and media, television, intellectual property ownership and infringement,
tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition,
environmental, health and safety.
By way of example, laws and regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are
extensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture, distribution and use of devices,
locking devices to a carrier's network, or mandating the use of devices on more than one carrier's network. These devices are also subject to certification and
regulation by governmental and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes are
extensive and time consuming, and could result in additional testing requirements, product modifications, or delays in product shipment dates, or could preclude
the Company from selling certain products.
Apple Inc. | 2017 Form 10-K | 12
The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and has made prepayments to
certain of its suppliers associated with long-term supply agreements. While these arrangements help ensure the supply of components and finished goods, if
these outsourcing partners or suppliers experience severe financial problems or other disruptions in their business, such continued supply could be reduced or
terminated and the net realizable value of these assets could be negatively impacted.
Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction,
further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations
or in their interpretation, could individually or in the aggregate make the Company's products and services less attractive to the Company's customers, delay the
introduction of new products in one or more regions, or cause the Company to change or limit its business practices. The Company has implemented policies
and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Company's employees,
contractors, or agents will not violate such laws and regulations or the Company's policies and procedures.
Many of the Company's products include third-party intellectual property, which requires licenses from those third parties. Based on past experience and
industry practice, the Company believes such licenses generally can be obtained on reasonable terms. There is, however, no assurance that the necessary
licenses can be obtained on acceptable terms or at all. Failure to obtain the right to use third-party intellectual property, or to use such intellectual property on
commercially reasonable terms, could preclude the Company from selling certain products or otherwise have a material adverse impact on the Company's
financial condition and operating results.
The Company relies on sole-sourced outsourcing partners in the U.S., Asia and Europe to supply and manufacture many critical components, and on
outsourcing partners primarily located in Asia, for final assembly of substantially all of the Company's hardware products. Any failure of these partners to perform
may have a negative impact on the Company's cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or
transit to final destinations may be disrupted for a variety of reasons including, but not limited to, natural and man-made disasters, information technology
system failures, commercial disputes, military actions or economic, business, labor, environmental, public health, or political issues.
While the Company maintains insurance coverage that is intended to address certain aspects of data security risks, such insurance coverage may be insufficient
to cover all losses or all types of claims that may arise.
The Company depends on component and product manufacturing and logistical services provided by outsourcing partners, many of which are
located outside of the U.S.
The Company's business is subject to the risks of international operations.
Item 1A. Risk Factors
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form
10-K. The following information should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including
but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company's actual financial condition and operating
results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially
and adversely affect the Company's business, financial condition, operating results and stock price.
Because of the following factors, as well as other factors affecting the Company's financial condition and operating results, past financial performance should not
be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Global and regional economic conditions could materially adversely affect the Company.
The Company's operations and performance depend significantly on global and regional economic conditions. Uncertainty about global and regional economic
conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, higher unemployment, financial market volatility,
government austerity programs, negative financial news, declines in income or asset values and/or other factors. These worldwide and regional economic
conditions could have a material adverse effect on demand for the Company's products and services. Demand also could differ materially from the Company's
expectations as a result of currency fluctuations because the Company generally raises prices on goods and services sold outside the U.S. to correspond with
the effect of a strengthening of the U.S. dollar. Other factors that could influence worldwide or regional demand include changes in fuel and other energy costs,
conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit, consumer confidence and other
macroeconomic factors affecting consumer spending behavior. These and other economic factors could materially adversely affect demand for the Company's
products and services.
In the event of financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry, or significant
financial service institution failures, there could be tightening in the credit markets, low liquidity and extreme volatility in fixed income, credit, currency and equity
markets. This could have a number of effects on the Company's business, including the insolvency or financial instability of outsourcing partners or suppliers or
their inability to obtain credit to finance development and/or manufacture products, resulting in product delays; inability of customers, including channel partners,
to obtain credit to finance purchases of the Company's products; failure of derivative counterparties and other financial institutions; and restrictions on the
Company's ability to issue new debt. Other income and expense also could vary materially from expectations depending on gains or losses realized on the sale
or exchange of financial instruments; impairment charges resulting from revaluations of debt and equity securities and other investments; changes in interest
rates; increases or decreases in cash balances; volatility in foreign exchange rates; and changes in fair value of derivative instruments. Increased volatility in the
financial markets and overall economic uncertainty would increase the risk of the actual amounts realized in the future on the Company's financial instruments
differing significantly from the fair values currently assigned to them.
Global markets for the Company's products and services are highly competitive and subject to rapid technological change, and the Company may be
unable to compete effectively in these markets.
The Company's products and services compete in highly competitive global markets characterized by aggressive price competition and resulting downward
pressure on gross margins, frequent introduction of new products, short product life cycles, evolving industry standards, continual improvement in product
price/performance characteristics, rapid adoption of technological and product advancements by competitors and price sensitivity on the part of consumers.
The Company's ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of innovative new products, services
and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its products, including the
hardware, operating system, numerous software applications and related services. As a result, the Company must make significant investments in R&D. The
Company currently holds a significant number of patents and copyrights and has registered and/or has applied to register numerous patents, trademarks and
service marks. In contrast, many of the Company's competitors seek to compete primarily through aggressive pricing and very low cost structures, and
emulating the Company's products and infringing on its intellectual property. If the Company is unable to continue to develop and sell innovative new products
with attractive margins or if competitors infringe on the Company's intellectual property, the Company's ability to maintain a competitive advantage could be
adversely affected.
Apple Inc. | 2017 Form 10-K | 8
Substantially all of the Company's manufacturing is performed in whole or in part by a few outsourcing partners located primarily in Asia. The Company has also
outsourced much of its transportation and logistics management. While these arrangements may lower operating costs, they also reduce the Company's direct
control over production and distribution. It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or the
Company's flexibility to respond to changing conditions. Although arrangements with these partners may contain provisions for warranty expense
reimbursement, the Company may remain responsible to the consumer for warranty service in the event of product defects and could experience an
unanticipated product defect or warranty liability. While the Company relies on its partners to adhere to its supplier code of conduct, material violations of the
supplier code of conduct could occur.
The Company markets certain mobile communication and media devices based on the iOS mobile operating system and also markets related services,
including third-party digital content and applications. The Company faces substantial competition in these markets from companies that have significant
technical, marketing, distribution and other resources, as well as established hardware, software and digital content supplier relationships; and the Company has
a minority market share in the global smartphone market. Additionally, the Company faces significant competition as competitors reduce their selling prices and
attempt to imitate the Company's product features and applications within their own products or, alternatively, collaborate with each other to offer solutions that
are more competitive than those they currently offer. The Company competes with business models that provide content to users for free. The Company also
competes with illegitimate means to obtain third-party digital content and applications. Some of the Company's competitors have greater experience, product
breadth and distribution channels than the Company. Because some current and potential competitors have substantial resources and/or experience and a
lower cost structure, they may be able to provide products and services at little or no profit or even at a loss. The Company also expects competition to intensify
as competitors attempt to imitate the Company's approach to providing components seamlessly within their individual offerings or work collaboratively to offer
integrated solutions. The Company's financial condition and operating results depend substantially on the Company's ability to continually improve iOS and iOS
devices in order to maintain their functional and design advantages.
There can be no assurance the Company will be able to continue to provide products and services that compete effectively.
The Company depends on the performance of distributors, carriers and other resellers.
The Company distributes its products through cellular network carriers, wholesalers, national and regional retailers and value-added resellers, many of whom
distribute products from competing manufacturers. The Company also sells its products and third-party products in most of its major markets directly to
education, enterprise and government customers and consumers and small and mid-sized businesses through its retail and online stores.
Some carriers providing cellular network service for iPhone subsidize users' purchases of the device. There is no assurance that such subsidies will be
continued at all or in the same amounts upon renewal of the Company's agreements with these carriers or in agreements the Company enters into with new
carriers.
The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected resellers' stores with Company
employees and contractors, and improving product placement displays. These programs could require a substantial investment while providing no assurance of
return or incremental revenue. The financial condition of these resellers could weaken, these resellers could stop distributing the Company's products, or
uncertainty regarding demand for some or all of the Company's products could cause resellers to reduce their ordering and marketing of the Company's
products.
Apple Inc. | 2017 Form 10-K | 9
The Company faces substantial inventory and other asset risk in addition to purchase commitment cancellation risk.
The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated demand or net realizable value
and accrues necessary cancellation fee reserves for orders of excess products and components. The Company also reviews its long-lived assets, including
capital assets held at its suppliers' facilities and inventory prepayments, for impairment whenever events or circumstances indicate the carrying amount of an
asset may not be recoverable. If the Company determines that impairment has occurred, it records a write-down equal to the amount by which the carrying value
of the asset exceeds its fair value. Although the Company believes its provisions related to inventory, capital assets, inventory prepayments and other assets
and purchase commitments are currently adequate, no assurance can be given that the Company will not incur additional related charges given the rapid and
unpredictable pace of product obsolescence in the industries in which the Company competes.
The Company must order components for its products and build inventory in advance of product announcements and shipments. Manufacturing purchase
obligations typically cover forecasted component and manufacturing requirements for periods up to 150 days. Because the Company's markets are volatile,
competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient
amounts of components or products, or not fully utilize firm purchase commitments.
Future operating results depend upon the Company's ability to obtain components in sufficient quantities on commercially reasonable terms.
Because the Company currently obtains components from single or limited sources, the Company is subject to significant supply and pricing risks. Many
components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing
fluctuations. While the Company has entered into agreements for the supply of many components, there can be no assurance that the Company will be able to
extend or renew these agreements on similar terms, or at all. A number of suppliers of components may suffer from poor financial conditions, which can lead to
business failure for the supplier or consolidation within a particular industry, further limiting the Company's ability to obtain sufficient quantities of components on
commercially reasonable terms. The effects of global or regional economic conditions on the Company's suppliers, described in “ Global and regional economic
conditions could materially adversely affect the Company" above, also could affect the Company's ability to obtain components. Therefore, the Company
remains subject to significant risks of supply shortages and price increases.
The Company's new products often utilize custom components available from only one source. When a component or product uses new technologies, initial
capacity constraints may exist until the suppliers' yields have matured or manufacturing capacity has increased. Continued availability of these components at
acceptable prices, or at all, may be affected for any number of reasons, including if those suppliers decide to concentrate on the production of common
components instead of components customized to meet the Company's requirements. The supply of components for a new or existing product could be delayed
or constrained, or a key manufacturing vendor could delay shipments of completed products to the Company.
The Company is the only authorized maker of hardware using macOS, which has a minority market share in the personal computer market. This market has
been contracting and is dominated by computer makers using competing operating systems, most notably Windows. In the market for personal computers and
accessories, the Company faces a significant number of competitors, many of which have broader product lines, lower-priced products and a larger installed
customer base. Historically, consolidation in this market has resulted in larger competitors. Competition has been particularly intense as competitors have
aggressively cut prices and lowered product margins. An increasing number of internet-enabled devices that include software applications and are smaller and
simpler than traditional personal computers compete for market share with the Company's existing products. The Company's financial condition and operating
results also depend on its ability to continually improve the Mac platform to maintain its functional and design advantages.
The Company derives a significant portion of its revenue and earnings from its international operations. Compliance with applicable U.S. and foreign laws and
regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy
requirements, environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although the
Company has implemented policies and procedures to comply with these laws and regulations, a violation by the Company's employees, contractors or agents
could nevertheless occur. In some cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country.
Violations of these laws and regulations could materially adversely affect the Company's brand, international growth efforts and business.
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.
Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce new products,
services and technologies, enhance existing products and services, effectively stimulate customer demand for new and upgraded products and successfully
manage the transition to these new and upgraded products. The success of new product introductions depends on a number of factors including, but not limited
to, timely and successful product development, market acceptance, the Company's ability to manage the risks associated with new product production ramp-up
issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated
product demand, the availability of products in appropriate quantities and at expected costs to meet anticipated demand and the risk that new products may
have quality or other defects or deficiencies in the early stages of introduction. Accordingly, the Company cannot determine in advance the ultimate effect of new
product introductions and transitions.
The Company's retail stores have required and will continue to require a substantial investment and commitment of resources and are subject to
numerous risks and uncertainties.
The Company's financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
The Company's primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses
worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company's foreign currency-denominated
sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company's products. Margins on sales
of the Company's products in foreign countries and on sales of products that include components obtained from foreign suppliers, could be materially adversely
affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local
prices to fully offset the dollar's strengthening, or at all, which would adversely affect the U.S. dollar value of the Company's foreign currency-denominated sales
and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Company's foreign currency-
denominated sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments,
thereby limiting the benefit. Additionally, strengthening of foreign currencies may increase the Company's cost of product components denominated in those
currencies, thus adversely affecting gross margins.
The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency
exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in
foreign exchange rates over the limited time the hedges are in place.
The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.
Given the global nature of its business, the Company has both domestic and international investments. Credit ratings and pricing of the Company's investments
can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk or other factors. As a result, the value and
liquidity of the Company's cash, cash equivalents and marketable securities may fluctuate substantially. Therefore, although the Company has not realized any
significant losses on its cash, cash equivalents and marketable securities, future fluctuations in their value could result in significant realized losses.
The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments related to long-term supply
agreements, and this risk is heightened during periods when economic conditions worsen.
The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and value-added resellers. The Company also sells its
products directly to small and mid-sized businesses and education, enterprise and government customers. A substantial majority of the Company's outstanding
trade receivables are not covered by collateral, third-party financing arrangements or credit insurance. The Company's exposure to credit and collectability risk
on its trade receivables is higher in certain international markets and its ability to mitigate such risks may be limited. The Company also has unsecured vendor
non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or assemble final
products for the Company. In addition, the Company has made prepayments associated with long-term supply agreements to secure supply of inventory
components. As of September 30, 2017, a significant portion of the Company's trade receivables was concentrated within cellular network carriers, and its
vendor non-trade receivables and prepayments related to long-term supply agreements were concentrated among a few individual vendors located primarily in
Asia. While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables, as well as long-term
prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.
The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax
liabilities.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company's subsidiaries are organized.
Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company's effective tax rates could be
affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or
changes in tax laws or their interpretation, including in the U.S. and Ireland.
The Company is also subject to the examination of its tax returns and other tax matters by the U.S. Internal Revenue Service (the "IRS”) and other tax
authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the
adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company's effective tax rates were to increase,
particularly in the U.S. or Ireland, or if the ultimate determination of the Company's taxes owed is for an amount in excess of amounts previously accrued, the
Company's financial condition, operating results and cash flows could be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Apple Inc. | 2017 Form 10-K | 16
Item 2.
Properties
As of September 30, 2017, the Company owned facilities and land for corporate functions, R&D and data centers at various locations throughout the U.S.
Outside the U.S., the Company owned additional facilities and land for various purposes.
The Company believes its existing facilities and equipment, which are used by all operating segments, are in good operating condition and are suitable for the
conduct of its business. The Company has invested in internal capacity and strategic relationships with outside manufacturing vendors and continues to make
investments in capital equipment as needed to meet anticipated demand for its products.
Item 3. Legal Proceedings
The Company is subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. 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 legal proceedings and claims brought against the
Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of
these legal matters were resolved against the Company in a reporting period for amounts in excess of management's expectations, the Company's consolidated
financial statements for that reporting period could be materially adversely affected. See the risk factor" The Company could be impacted by unfavorable results
of legal proceedings, such as being found to have infringed on intellectual property rights" in Part I, Item 1A of this Form 10-K under the heading "Risk Factors."
The Company settled certain matters during the fourth quarter of 2017 that did not individually or in the aggregate have a material impact on the Company's
financial condition or operating results.
Item 4. Mine Safety Disclosures
Not applicable.
Apple Inc. | 2017 Form 10-K | 17
The Company also could be significantly affected by other risks associated with international activities including, but not limited to, economic and labor
conditions, increased duties, taxes and other costs and political instability. Margins on sales of the Company's products in foreign countries, and on sales of
products that include components obtained from foreign suppliers, could be materially adversely affected by international trade regulations, including duties,
tariffs and antidumping penalties. The Company is also exposed to credit and collectability risk on its trade receivables with customers in certain international
markets. There can be no assurance the Company can effectively limit its credit risk and avoid losses.
Apple Inc. | 2017 Form 10-K | 15
The Company's stock price has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the Company, the
technology industry and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that
may have been unrelated to these companies' operating performance. Price volatility over a given period may cause the average price at which the Company
repurchases its own stock to exceed the stock's price at a given point in time. The Company believes its stock price should reflect expectations of future growth
and profitability. The Company also believes its stock price should reflect expectations that its cash dividend will continue at current levels or grow and that its
current share repurchase program will be fully consummated. Future dividends are subject to declaration by the Company's Board of Directors, and the
Company's share repurchase program does not obligate it to acquire any specific number of shares. If the Company fails to meet expectations related to future
growth, profitability, dividends, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse
impact on investor confidence and employee retention.
The Company's headquarters are located in Cupertino, California. As of September 30, 2017, the Company owned 13.4 million square feet and leased
23.0 million square feet of building space, primarily in the U.S. Additionally, the Company owned a total of 4,928 acres of land, primarily in the U.S.
The Company has typically experienced higher net sales in its first quarter compared to other quarters due in part to seasonal holiday demand. Additionally, new
product introductions can significantly impact net sales, product costs and operating expenses. Further, the Company generates a majority of its net sales from
a single product and a decline in demand for that product could significantly impact quarterly net sales. The Company could also be subject to unexpected
developments late in a quarter, such as lower-than-anticipated demand for the Company's products, issues with new product introductions, an internal systems
failure, or failure of one of the Company's logistics, components supply, or manufacturing partners.
The Company's retail stores have required substantial investment in equipment and leasehold improvements, information systems, inventory and personnel.
The Company also has entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-
profile venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities. Because of their unique design elements,
locations and size, these stores require substantially more investment than the Company's more typical retail stores. Due to the high cost structure associated
with the Company's retail stores, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination
costs, write-offs of equipment and leasehold improvements and severance costs.
The Company's stock price is subject to volatility.
Many factors unique to retail operations, some of which are beyond the Company's control, pose risks and uncertainties. These risks and uncertainties include,
but are not limited to, macro-economic factors that could have an adverse effect on general retail activity, as well as the Company's inability to manage costs
associated with store construction and operation, the Company's failure to manage relationships with its existing retail partners, more challenging environments
in managing retail operations outside the U.S., costs associated with unanticipated fluctuations in the value of retail inventory, and the Company's inability to
obtain and renew leases in quality retail locations at a reasonable cost.
Investment in new business strategies and acquisitions could disrupt the Company's ongoing business and present risks not originally
contemplated.
The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve significant risks and
uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return of capital and
unidentified issues not discovered in the Company's due diligence. These new ventures are inherently risky and may not be successful.
The Company's business and reputation may be impacted by information technology system failures or network disruptions.
Apple Inc. | 2017 Form 10-K | 13
There may be losses or unauthorized access to or releases of confidential information, including personally identifiable information, that could
subject the Company to significant reputational, financial, legal and operational consequences.
The Company's business requires it to use and store confidential information, including, among other things, personally identifiable information ("PII”) with
respect to the Company's customers and employees. The Company devotes significant resources to network and data security, including through the use of
encryption and other security measures intended to protect its systems and data. But these measures cannot provide absolute security, and losses or
unauthorized access to or releases of confidential information may still occur, which could materially adversely affect the Company's reputation, financial
condition and operating results.
The Company's business also requires it to share confidential information with suppliers and other third parties. Although the Company takes steps to secure
confidential information that is provided to third parties, such measures may not be effective and losses or unauthorized access to or releases of confidential
information may still occur, which could materially adversely affect the Company's reputation, financial condition and operating results.
For example, the Company may experience a security breach impacting the Company's information technology systems that compromises the confidentiality,
integrity or availability of confidential information. Such an incident could, among other things, impair the Company's ability to attract and retain customers for its
products and services, impact the Company's stock price, materially damage supplier relationships, and expose the Company to litigation or government
investigations, which could result in penalties, fines or judgments against the Company.
Although malicious attacks perpetrated to gain access to confidential information, including PII, affect many companies across various industries, the Company
is at a relatively greater risk of being targeted because of its high profile and the value of the confidential information it creates, owns, manages, stores and
processes.
The Company may be subject to information technology system failures or network disruptions caused by natural disasters, accidents, power disruptions,
telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions. System redundancy and
other continuity measures may be ineffective or inadequate, and the Company's business continuity and disaster recovery planning may not be sufficient for all
eventualities. Such failures or disruptions could adversely impact the Company's business by, among other things, preventing access to the Company's online
services, interfering with customer transactions or impeding the manufacturing and shipping of the Company's products. These events could materially
adversely affect the Company's reputation, financial condition and operating results.
Much of the Company's future success depends on the continued availability and service of key personnel, including its Chief Executive Officer, executive team
and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially
in Silicon Valley, where most of the Company's key personnel are located.
In addition to the risks relating to general confidential information described above, the Company may also be subject to specific obligations relating to health
data and payment card data. Health data may be subject to additional privacy, security and breach notification requirements, and the Company may be subject
to audit by governmental authorities regarding the Company's compliance with these obligations. If the Company fails to adequately comply with these rules and
requirements, or if health data is handled in a manner not permitted by law or under the Company's agreements with healthcare institutions, the Company could
be subject to litigation or government investigations, may be liable for associated investigatory expenses, and could also incur significant fees or fines.
Under payment card rules and obligations, if cardholder information is potentially compromised, the Company could be liable for associated investigatory
expenses and could also incur significant fees or fines if the Company fails to follow payment card industry data security standards. The Company could also
experience a significant increase in payment card transaction costs or lose the ability to process payment cards if it fails to follow payment card industry data
security standards, which would materially adversely affect the Company's reputation, financial condition and operating results.
The Company's business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
The Company is subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws
apply not only to third-party transactions, but also may restrict transfers of PII among the Company and its international subsidiaries. Several jurisdictions have
passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from
jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause the Company to incur substantial costs or require the
Company to change its business practices. Noncompliance could result in significant penalties or legal liability.
The Company makes statements about its use and disclosure of PII through its privacy policy, information provided on its website and press statements. Any
failure by the Company to comply with these public statements or with other federal, state or international privacy-related or data protection laws and regulations
could result in proceedings against the Company by governmental entities or others. In addition to reputational impacts, penalties could include ongoing audit
requirements and significant legal liability.
Apple Inc. | 2017 Form 10-K | 14
The Company's success depends largely on the continued service and availability of key personnel.
The Company expects its quarterly revenue and operating results to fluctuate.
The Company's business may be impacted by political events, war, terrorism, public health issues, natural disasters and other business
interruptions.
War, terrorism, geopolitical uncertainties, public health issues and other business interruptions have caused and could cause damage or disruption to
international commerce and the global economy, and thus could have a material adverse effect on the Company, its suppliers, logistics providers, manufacturing
vendors and customers, including channel partners. The Company's business operations are subject to interruption by, among others, natural disasters, whether
as a result of climate change or otherwise, fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile
acts, labor disputes, public health issues and other events beyond its control. Such events could decrease demand for the Company's products, make it difficult
or impossible for the Company to make and deliver products to its customers, including channel partners, or to receive components from its suppliers, and
create delays and inefficiencies in the Company's supply chain. While the Company's suppliers are required to maintain safe working environments and
operations, an industrial accident could occur and could result in disruption to the Company's business and harm to the Company's reputation. Should major
public health issues, including pandemics, arise, the Company could be adversely affected by more stringent employee travel restrictions, additional limitations
in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products and disruptions in the
operations of the Company's manufacturing vendors and component suppliers. The majority of the Company's R&D activities, its corporate headquarters,
information technology systems and other critical business operations, including certain component suppliers and manufacturing vendors, are in locations that
could be affected by natural disasters. In the event of a natural disaster, the Company could incur significant losses, require substantial recovery time and
experience significant expenditures in order to resume operations.
The Company's profit margins vary across its products and distribution channels. The Company's software, accessories, and service and support contracts
generally have higher gross margins than certain of the Company's other products. Gross margins on the Company's hardware products vary across product
lines and can change over time as a result of product transitions, pricing and configuration changes, and component, warranty, and other cost fluctuations. The
Company's direct sales generally have higher associated gross margins than its indirect sales through its channel partners. In addition, the Company's gross
margin and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic or
channel mix, component cost increases, the strengthening U.S. dollar, price competition, or the introduction of new products, including those that have higher
cost structures with flat or reduced pricing.
The Company has implemented systems and processes intended to secure its information technology systems and prevent unauthorized access to or loss of
sensitive data, including through the use of encryption and authentication technologies. As with all companies, these security measures may not be sufficient for
all eventualities and may be vulnerable to hacking, employee error, malfeasance, system error, faulty password management or other irregularities. For
example, third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which
may in turn be used to access the Company's information technology systems. To help protect customers and the Company, the Company monitors its services
and systems for unusual activity and may freeze accounts under suspicious circumstances, which, among other things, may result in the delay or loss of
customer orders or impede customer access to the Company's products and services.
20,587
(10)%
18,484
29,980
19,251
11%
4%
Mac net sales increased during 2017 compared to 2016 due primarily to a different mix of Macs with higher average selling prices and higher Mac unit sales.
The weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Mac net sales during 2017 compared to 2016.
Net sales
Apple Inc. | 2017 Form 10-K | 24
Services
The following table presents Services net sales information for 2017, 2016 and 2015 (dollars in millions):
Percentage of total net sales
2017
11%
$
Mac net sales decreased during 2016 compared to 2015 primarily due to lower year-over-year Mac unit sales, which declined at rates similar to the overall
market. The effect of weakness in most foreign currencies relative to the U.S. dollar also negatively impacted Mac net sales.
11%
2015
$
iPad net sales decreased during 2016 compared to 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 average selling price due to a shift in mix to higher-priced iPads.
13%
Mac
The following table presents Mac net sales and unit sales information for 2017, 2016 and 2015 (dollars in millions and units in thousands):
2017
Change
2016
Change
Net sales
Percentage of total net sales
Unit sales
$
25,850
13%
$
22,831
(10)%
25,471
Change
40%
23% $
$
86,613
iPad net sales decreased during 2017 compared to 2016 due to lower iPad unit sales and a different mix of iPads with lower average selling prices. The
weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on iPad net sales during 2017 compared to 2016.
Change
2015
(8)%
93,864
40%
Americas net sales increased during 2017 compared to 2016 due primarily to higher net sales of iPhone, Services and Mac.
Americas net sales decreased during 2016 compared to 2015 due primarily to lower net sales of iPhone.
Europe
The following table presents Europe net sales information for 2017, 2016 and 2015 (dollars in millions):
Net sales
Percentage of total net sales
2017
$
54,938
24%
12%
2016
2016
42%
24,348
11%
Change
2015
22% $
19,909
9%
The year-over-year growth in Services net sales in 2017 was due primarily to increases in App Store and licensing sales. Services net sales in the fourth quarter
of 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.
The year-over-year increase in Services net sales in 2016 was due primarily to growth from the App Store, licensing and AppleCare sales, partially offset by the
effect of weakness in most foreign currencies relative to the U.S. dollar. 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 segments consist of the Americas, Europe, Greater China,
Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and
Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company's
other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed
separately to better align with the location of the Company's customers and distribution partners and the unique market dynamics of each geographic region.
Further information regarding the Company's reportable segments can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial
Statements in Note 11, “Segment Information and Geographic Data."
Americas
The following table presents Americas net sales information for 2017, 2016 and 2015 (dollars in millions):
2017
Net sales
96,600
Percentage of total net sales
Change
54,856
iPhone net sales decreased during 2016 compared to 2015. The Company believes the sales decline was due primarily to a lower rate of iPhone upgrades
during 2016 compared to 2015 and challenging macroeconomic conditions in a number of major markets in 2016. Average selling prices for iPhone were lower
year-over-year during 2016 due primarily to a different mix of iPhones, including the iPhone SE introduced in 2016, and the effect of weakness in most foreign
currencies relative to the U.S. dollar.
10%
4 %
18,484
(10)%
20,587
(1) Includes deferrals and amortization of related software upgrade rights and non-software services.
(2) Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services. Services net sales in the fourth quarter of 2017 included a
favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.
(3) Includes sales of Apple TV, Apple Watch, Beats products, iPod touch and Apple-branded and third-party accessories.
Apple Inc. | 2017 Form 10-K | 23
Product Performance
iPhone
The following table presents iPhone net sales and unit sales information for 2017, 2016 and 2015 (dollars in millions and units in thousands):
Net sales
Percentage of total net sales
Unit sales
2017
$
141,319
54,856
62%
(17)%
(4)%
$
229,234
6% $
215,639
(8)%
$
233,715
Unit Sales by Product:
iPhone
iPad
Mac
216,756
2%
211,884
(8)%
231,218
43,753
19,251
45,590
216,756
Change
2016
$
19,222
8%
43,753
Change
2016
(7)%
$
20,628
10%
(4)%
45,590
Change
2015
(11)%
$
23,227
2017
Unit sales
Percentage of total net sales
Net sales
3%
$
136,700
63%
2%
211,884
Change
2015
(17)%
(12)%
155,041
66%
(8)%
231,218
iPhone net sales increased during 2017 compared to 2016 due to higher iPhone unit sales and a different mix of iPhones with higher average selling prices. The
weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on iPhone net sales during 2017 compared to 2016.
Change
iPad
The following table presents iPad net sales and unit sales information for 2017, 2016 and 2015 (dollars in millions and units in thousands):
$
2016
2015
49,952
2,745
$
(903)
(733)
2,921
$
3,999
(1,456)
(1,195)
(133)
(2,323)
$
5,201
$
2015
Change
2016
Change
2017
104% $
Total other income/(expense), net
1,348
1,285
40.1%
Gross margin percentage decreased in 2017 compared to 2016 due primarily to higher product costs, partially offset by a favorable shift in mix to services. Year-
over-year gross margin increased due primarily to a shift in mix to services and an overall increase in product volumes. The weakness in foreign currencies
relative to the U.S. dollar had an unfavorable impact on gross margin percentage and gross margin during 2017 compared to 2016.
Gross margin percentage decreased in 2016 compared to 2015 due primarily to the effect of weakness in most foreign currencies relative to the U.S. dollar and,
to a lesser extent, unfavorable leverage on fixed costs from lower net sales, partially offset by a favorable shift in mix to services.
Apple Inc. | 2017 Form 10-K | 26
The Company anticipates gross margin percentage during the first quarter of 2018 to be between 38.0% and 38.5%. The foregoing statement regarding the
Company's expected gross margin percentage in the first quarter of 2018 is forward-looking and could differ from actual results. The Company's future gross
margins can be impacted by multiple factors including, but not limited to, those set forth in Part I, Item 1A of this Form 10-K under the heading "Risk Factors" and
those described in this paragraph. In general, the Company believes gross margins will remain under downward pressure due to a variety of factors, including
continued industry-wide global product pricing pressures, increased competition, compressed product life cycles, product transitions, potential increases in the
cost of components, and potential strengthening of the U.S. dollar, as well as potential increases in the costs of outside manufacturing services and a potential
shift in the Company's sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take
product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Company's ability to manage product quality
and warranty costs effectively and to stimulate demand for certain of its products. Due to the Company's significant international operations, its financial
condition and operating results, including gross margins, could be significantly affected by fluctuations in exchange rates.
Operating Expenses
Operating expenses for 2017, 2016 and 2015 were as follows (dollars in millions):
2017
Change
2016
Change
2015
Research and development
$
11,581
15%
$
5% $
93,626
Other expense, net
Interest and dividend income
14,329
$
(1)%
14,194
$
8%
15,261
$
Selling, general and administrative
3%
5%
5%
Percentage of total net sales
8,067
25 % $
10,045
Total net sales
Percentage of total net sales
Interest expense
7%
6%
Other income/(expense), net for 2017, 2016 and 2015 was as follows (dollars in millions):
Other Income/(Expense), Net
The year-over-year growth in selling, general and administrative expense in 2017 compared to 2016 was driven primarily by an increase in headcount-related
expenses, variable selling expenses and infrastructure-related costs. The decrease in selling, general and administrative expense in 2016 compared to 2015
was due primarily to lower discretionary expenditures and advertising costs, partially offset by an increase in headcount-related expenses.
Selling, General and Administrative
The year-over-year growth in R&D expense in 2017 and 2016 was driven primarily by increases in headcount-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 to the development of new and updated products and services that are central to the Company's core business strategy.
Research and Development
10%
22,396
8%
24,239
11%
12%
Percentage of total net sales
$
11%
26,842
$
Total operating expenses
7%
10% $
233,715
140,089
229,234 $
141,048
88,186 $
38.5%
22%
Change
(17)%
$
58,715
25%
Greater China net sales decreased during 2017 compared to 2016 due primarily to lower net sales of iPhone, partially offset by higher net sales of Services. The
weakness in foreign currencies relative to the U.S. dollar had an unfavorable impact on Greater China net sales during 2017 compared to 2016.
Greater China net sales decreased during 2016 compared to 2015 due primarily to lower net sales of iPhone and the effect of weakness in foreign currencies
relative to the U.S. dollar.
Japan
The following table presents Japan net sales information for 2017, 2016 and 2015 (dollars in millions):
2017
Change
2016
Net sales
Percentage of total net sales
$
17,733
48,492
5%
(8)% $
Change
23%
Change
2015
(1)%
50,337
22%
Europe net sales increased during 2017 compared to 2016 due primarily to higher net sales of iPhone and Services. The weakness in foreign currencies relative
to the U.S. dollar had an unfavorable impact on Europe net sales during 2017 compared to 2016.
Europe net sales decreased during 2016 compared to 2015 driven primarily by the effect of weakness in foreign currencies relative to the U.S. dollar and a
decrease in net sales of Mac, largely offset by an increase in iPhone unit sales and Services.
Apple Inc. | 2017 Form 10-K | 25
Greater China
The following table presents Greater China net sales information for 2017, 2016 and 2015 (dollars in millions):
Net sales
Percentage of total net sales
2017
$
44,764
20%
2016
215,639 $
131,376
84,263 $
39.1%
$
8%
2015
(10)% $
15,093
6%
Rest of Asia Pacific net sales increased during 2017 compared to 2016 due primarily to higher net sales of iPhone, Services and Mac. The strength in foreign
currencies relative to the U.S. dollar had a favorable impact on Rest of Asia Pacific net sales during 2017 compared to 2016.
Rest of Asia Pacific net sales decreased during 2016 compared to 2015 due primarily to lower net sales of iPhone and the effect of weakness in foreign
currencies relative to the U.S. dollar.
Gross Margin
Gross margin for 2017, 2016 and 2015 was as follows (dollars in millions):
Net sales
Cost of sales
Gross margin
Gross margin percentage
2017
2016
2015
$
$
Change
16,928
6%
11% $
8%
Change
2015
8% $
15,706
7%
The year-over-year increase in Japan net sales in 2017 and 2016 was due primarily to higher net sales of Services and the strength 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 2017, 2016 and 2015 (dollars in millions):
Net sales
Percentage of total net sales
2017
$
15,199
7%
Change
2016
13,654
10,067
Total Number
11,132
$
143 $
142
$
164
$
194
S&P Information Technology Index
$
100 $
107
$
138
$
141
$
173
119
$
100 $
S&P 500 Index
September
2012
September
2013
September
2014
September
2015
September
September
2016
2017
Apple Inc.
$
100 $
74 $
111 $
128 $
129
$
179
$
Copyright © 2017 S&P, a division of McGraw Hill Financial. All rights reserved.
Copyright © 2017 Dow Jones & Co. All rights reserved.
223
$
Shares used in computing earnings per share:
Basic
Diluted
2017
2016
2015
2014
2013
Share repurchase activity during the three months ended September 30, 2017 was as follows (in millions, except number of shares, which are reflected in
thousands, and per share amounts):
229,234 $
$
48,351 $
215,639 $
45,687 $
233,715 $
53,394 $
182,795 $
39,510 $
170,910
37,037
$
Cash dividends declared per share
Dow Jones U.S. Technology Supersector Index
Diluted
Earnings per share:
100
$
105
$
137
$
137
$
167
$
214
Apple Inc. | 2017 Form 10-K | 20
Item 6.
Selected Financial Data
The information set forth below for the five years ended September 30, 2017, is not necessarily indicative of results of future operations, and should be read in
conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information
presented below (in millions, except number of shares, which are reflected in thousands, and per share amounts).
Net sales
Net income
Basic
9.27 $
$100 invested on 9/28/12 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company's common stock and
September 30th for indexes.
9/30/17
4,510
(2)
4,510
15,069 (3)
(3)
9,684
$
160.06
15,069 (3)
9,684
9,313
$
155.69
48,652
9,313
$
44,023
(1) In May 2017, the Company's Board of Directors increased the Company's share repurchase authorization from $175 billion to $210 billion of the Company's
common stock, of which $166 billion had been utilized as of September 30, 2017. The remaining $44 billion in the table represents the amount available to
repurchase shares under the authorized repurchase program as of September 30, 2017. 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 Exchange Act.
10,076
(2) In May 2017, the Company entered into an accelerated share repurchase arrangement ("ASR") to purchase up to $3.0 billion of the Company's common stock. In
August 2017, the purchase period for this ASR ended and an additional 4.5 million shares were delivered and retired. In total, 20.1 million shares were delivered
under this ASR at an average repurchase price of $149.20.
148.87
10,076
Average
Price
Paid Per
Share
of Shares
Purchased
Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
Approximate Dollar
Value of
Shares That May Yet Be
Purchased
Under the Plans or
Programs (1)
Periods
July 2, 2017 to August 5, 2017:
Open market and privately negotiated purchases
August 6, 2017 to September 2, 2017:
May 2017 ASR
August 2017 ASR
Open market and privately negotiated purchases
September 3, 2017 to September 30, 2017:
Open market and privately negotiated purchases
Total
$
Dow Jones U.S. Technology Supersector Index
(3) In August 2017, the Company entered into a new ASR to purchase up to $3.0 billion of the Company's common stock. In exchange for an up-front payment of $3.0
billion, the financial institution party to the arrangement committed to deliver shares to the Company during the ASR's purchase period, which will end in November
2017. The total number of shares ultimately delivered, and therefore the average 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.
Company Stock Performance
$250
$200
$150
$100
$50
$0
9/28/12
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
Among Apple Inc., the S&P 500 Index, the S&P Information Technology Index
and the Dow Jones U.S. Technology Supersector Index
9/28/13
9/27/14
Apple Inc.
S&P Information Technology Index
9/26/15
- - S&P 500 Index
9/24/16
The year-over-year increase in other income/(expense), net during 2017 was due primarily to higher interest income and the favorable impact of foreign
exchange-related items, partially offset by higher interest expense on debt. The year-over-year increase in other income/(expense), net during 2016 was due
primarily to higher interest income, partially offset by higher interest expense on debt and the unfavorable impact of foreign exchange-related items. The
weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.99%, 1.73% and 1.49% in 2017, 2016
and 2015, respectively.
Apple Inc. | 2017 Form 10-K | 19
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is traded on the Nasdaq Stock Market LLC ("Nasdaq") under the symbol AAPL.
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500 Index,
the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index for the five years ended September 30, 2017. The graph
assumes $100 was invested in each of the Company's common stock, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S.
Technology Supersector Index as of the market close on September 28, 2012. Note that historic stock price performance is not necessarily indicative of future
stock price performance.
$300
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Apple Inc. | 2017 Form 10-K | 18
The Company paid a total of $12.6 billion and $12.0 billion in dividends during 2017 and 2016, respectively, and expects to pay quarterly dividends of $0.63 per
common share each quarter, subject to declaration by the Board of Directors. The Company also plans to increase its dividend on an annual basis, subject to
declaration by the Board of Directors.
Dividends
As of October 20, 2017, there were 25,333 shareholders of record.
First Quarter
$118.69 $104.08
$123.82 $105.57
$144.50 $114.76
$109.43 $92.39
Second Quarter
Third Quarter
$156.65 $140.06
$112.39 $89.47
Fourth Quarter
$164.94 $142.41
$116.18 $91.50
Holders
2016 price range per share
2017 price range per share
The price range per share of common stock presented below represents the highest and lowest intraday sales prices for the Company's common stock on the
Nasdaq during each quarter of the two most recent years.
Price Range of Common Stock
Item 5.
11 %
8.35 $
$
50,337
Greater China
44,764
(8)%
48,492
(17)%
58,715
Japan
17,733
5%
16,928
8%
15,706
Rest of Asia Pacific
15,199
11 %
13,654
(1)%
(10)%
49,952
54,938
Sales Data
The following table shows net sales by operating segment and net sales and unit sales by product for 2017, 2016 and 2015 (dollars in millions and units in
thousands):
2017
Change
2016
Change
2015
Net Sales by Operating Segment:
Americas
$
96,600
12 %
$
86,613
(8)% $
93,864
Europe
10 %
Apple Inc. | 2017 Form 10-K | 22
15,093
$
(11)%
23,227
Mac (1)
25,850
13%
22,831
(10)%
25,471
Services (2)
29,980
23%
24,348
22%
19,909
Other Products (1)(3)
12,863
16%
20,628
Total net sales
(7)%
iPad (1)
229,234
6%
$
215,639
(8)%
$
233,715
Net Sales by Product:
iPhone (1)
$
141,319
3 %
$
136,700
(12)%
$
155,041
19,222
9.28
Net sales declined 8% or $18.1 billion during 2016 compared to 2015, primarily driven by a year-over-year decrease in iPhone net sales and the effect of
weakness in most foreign currencies relative to the U.S. dollar, partially offset by an increase in Services. In April 2016, the Company announced an increase to
its capital return program by raising the expected total size of the program from $200 billion to $250 billion through March 2018. This included increasing its
share repurchase authorization from $140 billion to $175 billion and raising its quarterly dividend from $0.52 to $0.57 per share beginning in May 2016. During
2016, the Company spent $29.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $12.2 billion. Additionally, the
Company issued $23.9 billion of U.S. dollar-denominated term debt and A$1.4 billion of Australian dollar-denominated term debt during 2016.
Net sales increased 6% or $13.6 billion during 2017 compared to 2016, primarily driven by growth in Services, iPhone and Mac. The year-over-year increase in
net sales reflected growth in each of the geographic operating segments, with the exception of Greater China. The weakness in foreign currencies relative to the
U.S. dollar had an unfavorable impact on net sales during 2017 compared to 2016. In May 2017, the Company announced an increase to its capital return
program by raising the expected total size of the program from $250 billion to $300 billion through March 2019. This included increasing its share repurchase
authorization from $175 billion to $210 billion and raising its quarterly dividend from $0.57 to $0.63 per share beginning in May 2017. During 2017, the Company
spent $33.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $12.8 billion. Additionally, the Company issued
$24.0 billion of U.S. dollar-denominated term debt, €2.5 billion of euro-denominated term debt and C$2.5 billion of Canadian dollar-denominated term debt
during 2017.
5,217,242
5,251,692
5,470,820
5,500,281
5,753,421
5,793,069
6,085,572
6,122,663
6,477,320
6,521,634
Total cash, cash equivalents and marketable securities
$
268,895 $
237,585 $
Total assets
$
375,319 $
Commercial paper
$
11,977 $
321,686 $
$
Total term debt (1)
1.64
$
$
$
6.49 $
5.72
$
9.21 $
8.31
$
9.22
$
6.45 $
5.68
EA
$
2.40
$
2.18
$
1.98
1.82
Fiscal 2016 Highlights
103,703 $
205,666
290,345 $
8,499 $
55,829 $
170,990 $
120,292 $
83,451
119,355 $
111,547 $
123,549
(1) Includes current and long-term portion of term debt.
(2) Excludes non-current deferred revenue.
Apple Inc. | 2017 Form 10-K | 21
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Annual Report on Form 10-K ("Form 10-K") contain forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain
assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words
such as "future," "anticipates," "believes," "estimates,” “expects," "intends,” “plans,” “predicts," "will," "would," "could," "can," "may," and similar terms. Forward-
looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the
heading "Risk Factors," which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial
statements and notes thereto included in Part II, Item 8 of this Form 10-K. All information presented herein is based on the Company's fiscal calendar. Unless
otherwise stated, references to particular years, quarters, months or periods refer to the Company's fiscal years ended in September and the associated
quarters, months and periods of those fiscal years. Each of the terms the "Company" and "Apple" as used herein refers collectively to Apple Inc. and its wholly-
owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as
required by law.
Overview and Highlights
The Company designs, manufactures and markets mobile communication and media devices and personal computers, 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,
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 "Digital Content and 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 retail and
online stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
Fiscal Period
The Company's fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company's fiscal year 2017 included 53 weeks and
ended on September 30, 2017. A 14th week was included in the first quarter of 2017, as is done every five or six years, to realign the Company's fiscal quarters
with calendar quarters. The Company's fiscal years 2016 and 2015 ended on September 24, 2016 and September 26, 2015, respectively, and spanned 52
weeks each.
Fiscal 2017 Highlights
20,208
8,105
78,927 $
24,826 $
$
$
155,239 $
231,839 $
146,761
207,000
6,308 $
28,987 $
16,960
Other long-term obligations (2)
$
40,415 $
Total liabilities
Total shareholders' equity
$
$
134,047
241,272 $
$
36,074
193,437 $
128,249 $
33,427 $
$
Apple Inc. | 2017 Form 10-K | 27
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions
involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and
reliably estimated and the other conditions for revenue recognition have been met. The Company's policy requires that, if refunds cannot be reliably estimated,
revenue is not recognized until reliable estimates can be made or the price protection lapses. For the Company's other customer incentive programs, the
estimated cost is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also
records reductions to revenue for expected future product returns based on the Company's historical experience. Future market conditions and product
transitions may require the Company to increase customer incentive programs that could result in reductions to future revenue. Additionally, certain customer
incentive programs require management to estimate the number of customers who will actually redeem the incentive. Management's estimates are based on
historical experience and the specific terms and conditions of particular incentive programs. If a greater than estimated proportion of customers redeems such
incentives, the Company would be required to record additional reductions to revenue, which would have an adverse impact on the Company's operating
results.
55,829
78,927 $
103,703 $
$
8,499
8,105 $
11,977 $
$
22,471
27,010 $
33,783 $
$
205,666
237,585 $
$
268,895 $
2015
2016
2017
Cash used in investing activities
Cash generated by operating activities
Working capital
Total term debt
Commercial paper
Property, plant and equipment, net
Cash, cash equivalents and marketable securities
The following table presents selected financial information and statistics as of and for the years ended September 30, 2017, September 24, 2016 and
September 26, 2015 (in millions):
Liquidity and Capital Resources
:|
Apple Inc. | 2017 Form 10-K | 29
$
27,831
$
27,863 $
$
2022
2021
2020
2019
2018
As of September 30, 2017, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $104.0
billion (collectively the "Notes"). During 2017, the Company repaid $3.5 billion of its Notes upon maturity. The Company has entered, and in the future may
enter, into interest rate swaps to manage interest rate risk on the Notes. In addition, the Company has entered, and in the future may enter, into foreign currency
swaps to manage foreign currency risk on the Notes. The future principal payments for the Company's Notes as of September 30, 2017 are as follows (in
millions):
The Company issues unsecured short-term promissory notes ("Commercial Paper”) pursuant to a commercial paper program. The Company uses the net
proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 30, 2017, the
Company had $12.0 billion of Commercial Paper outstanding, with a weighted-average interest rate of 1.20% and maturities generally less than nine months.
Apple Inc. | 2017 Form 10-K | 30
Debt
The Company's capital expenditures were $14.9 billion during 2017. The Company anticipates utilizing approximately $16.0 billion for capital expenditures
during 2018, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information
systems hardware, software and enhancements; and retail store facilities.
Capital Assets
During 2016, cash generated by operating activities of $65.8 billion was a result of $45.7 billion of net income and non-cash adjustments to net income of $20.1
billion. Cash used in investing activities of $46.0 billion during 2016 consisted primarily of cash used for purchases of marketable securities, net of sales and
maturities, of $30.6 billion and cash used to acquire property, plant and equipment of $12.7 billion. Cash used in financing activities of $20.5 billion during 2016
consisted primarily of cash used to repurchase common stock of $29.7 billion, cash used to pay dividends and dividend equivalents of $12.2 billion and cash
used to repay term debt of $2.5 billion, partially offset by proceeds from the issuance of term debt, net of $25.0 billion.
During 2017, cash generated by operating activities of $63.6 billion was a result of $48.4 billion of net income, non-cash adjustments to net income of $20.8
billion and a decrease in the net change in operating assets and liabilities of $5.6 billion, which included a one-time payment of $1.9 billion related to a multi-
year license agreement. Cash used in investing activities of $46.4 billion during 2017 consisted primarily of cash used for purchases of marketable securities,
net of sales and maturities, of $33.1 billion and cash used to acquire property, plant and equipment of $12.5 billion. Cash used in financing activities of $17.3
billion during 2017 consisted primarily of cash used to repurchase common stock of $32.9 billion, cash used to pay dividends and dividend equivalents of $12.8
billion and cash used to repay term debt of $3.5 billion, partially offset by proceeds from the issuance of term debt, net of $28.7 billion and proceeds from
commercial paper, net of $3.9 billion.
The Company's marketable securities investment portfolio is primarily invested 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.
As of September 30, 2017 and September 24, 2016, the Company's cash, cash equivalents and marketable securities held by foreign subsidiaries were $252.3
billion and $216.0 billion, respectively, and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject
to U.S. income taxation on repatriation to the U.S. In connection with the State Aid Decision, Ireland is still computing the recovery amount. The Company
expects the amount to be in line with the European Commission's announced recovery amount of €13 billion, plus interest of €1 billion. Once the recovery
amount is finalized by Ireland, the Company anticipates funding it, including interest, out of foreign cash. These amounts are expected to be placed into escrow
in 2018, where they will remain pending conclusion of all appeals.
The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working capital needs, capital
asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months. The Company
currently anticipates the cash used for future dividends, the share repurchase program and debt repayments will come from its current domestic cash, cash
generated from ongoing U.S. operating activities and from borrowings.
Cash used in financing activities
8,768
$
63,598 $
65,824
$
81,266
The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date
of adoption. The Company will adopt the new revenue standards in its first quarter of 2019 utilizing the full retrospective transition method. The new revenue
standards are not expected to have a material impact on the amount and timing of revenue recognized in the Company's consolidated financial statements.
$
(45,977) $
(56,274)
$
(17,347) $
(20,483) $
(17,716)
(46,446) $
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 Licensing ("ASU 2016-10"); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients ("ASU 2016-12"); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers ("ASU
2016-20"). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue
standards").
Revenue Recognition
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. The Company will adopt ASU 2016-13 in its first
quarter of 2021 utilizing the modified retrospective transition method. Based on the composition of the Company's investment portfolio, current market
conditions, and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements.
The Company must purchase components and build inventory in advance of product shipments and has invested in manufacturing-related assets, including
capital assets held at its suppliers' facilities. In addition, the Company has made prepayments to certain of its suppliers associated with long-term supply
agreements to secure supply of inventory components. The Company records a write-down for inventories of components and products, including third-party
products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company performs a regular review
of inventory that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels and component
cost trends. The Company also reviews its manufacturing-related capital assets and inventory prepayments for impairment whenever events or circumstances
indicate the carrying amount of such assets may not be recoverable. If the Company determines that an asset is not recoverable, it records an impairment loss
equal to the amount by which the carrying value of such an asset exceeds its fair value.
The industries in which the Company competes are subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. In
certain circumstances the Company may be required to record additional write-downs of inventory and/or impairments of manufacturing-related assets or
inventory prepayments. These circumstances include future demand or market conditions for the Company's products being less favorable than forecasted,
unforeseen technological changes or changes to the Company's product development plans that negatively impact the utility of any of these assets, or
significant deterioration in the financial condition of one or more of the Company's suppliers that hold any of the Company's manufacturing-related assets or to
whom the Company has made an inventory prepayment. Such write-downs would adversely affect the Company's financial condition and operating results in the
period when the additional write-downs were recorded.
The Company accrues for estimated purchase commitment cancellation fees related to inventory orders that have been canceled or are expected to be
canceled. Manufacturing purchase obligations typically cover the Company's forecasted component and manufacturing requirements for periods up to 150 days
. If there is an abrupt and substantial decline in demand for one or more of the Company's products, a change in the Company's product development plans, or
an unanticipated change in technological requirements for any of the Company's products, the Company may be required to record additional accruals for
cancellation fees that would adversely affect its results of operations in the period when the cancellation fees were identified and recorded.
Apple Inc. | 2017 Form 10-K | 34
Warranty Costs
The Company accrues for the estimated cost of warranties in the period the related revenue is recognized based on historical and projected warranty claim
rates, historical and projected cost per claim and knowledge of specific product failures that are outside of the Company's typical experience. The Company
regularly reviews these estimates and the current installed base of products subject to warranty protection to assess the appropriateness of its recorded
warranty liabilities and adjusts the amounts as necessary. If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty
liabilities could be required and could materially affect the Company's financial condition and operating results.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of its reported operating results. The provision for income taxes is computed using
the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities
are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be
realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies,
together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the Company's deferred tax assets. In the event that the
Company determines all or part of its net deferred tax assets are not realizable in the future, the Company will record an adjustment to the valuation allowance
that would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in
estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with
management's expectations could have a material impact on the Company's financial condition and operating results.
Legal and Other Contingencies
As discussed in Part I, Item 3 of this Form 10-K under the heading "Legal Proceedings" and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated
Financial Statements in Note 10, "Commitments and Contingencies," the Company is subject to various legal proceedings and claims that arise in the ordinary
course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination
of which requires significant judgment. 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 legal
proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an
outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management's
expectations, the Company's consolidated financial statements for that reporting period could be materially adversely affected.
Apple Inc. | 2017 Form 10-K | 35
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange forward and option positions and interest rate swaps, both on a stand-alone basis and in conjunction with
its underlying foreign currency and interest rate exposures. Given the effective horizons of the Company's risk management activities and the anticipatory nature
of the exposures, there can be no assurance these positions will offset more than a portion of the financial impact resulting from movements in either foreign
exchange or interest rates. Further, the recognition of the gains and losses related to these instruments may not coincide with the timing of gains and losses
related to the underlying economic exposures and, therefore, may adversely affect the Company's financial condition and operating results.
Provision for income taxes and effective tax rates for 2017, 2016 and 2015 were as follows (dollars in millions):
Apple Inc. | 2017 Form 10-K | 33
Apple Inc. | 2017 Form 10-K | 37
Actual future gains and losses associated with the Company's investment portfolio and derivative positions may differ materially from the sensitivity analyses
performed as of September 30, 2017 due to the inherent limitations associated with predicting the timing and amount of changes in interest rates, foreign
currency exchange rates and the Company's actual exposures and positions.
To provide a meaningful assessment of the foreign currency risk associated with certain of the Company's foreign currency derivative positions, the Company
performed a sensitivity analysis using a value-at-risk ("VAR") model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted
of using a Monte Carlo simulation to generate thousands of random market price paths assuming normal market conditions. The VAR is the maximum expected
loss in fair value, for a given confidence interval, to the Company's foreign currency derivative positions due to adverse movements in rates. The VAR model is
not intended to represent actual losses but is used as a risk estimation and management tool. Forecasted transactions, firm commitments and assets and
liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company estimates with 95% confidence, a
maximum one-day loss in fair value of $485 million as of September 30, 2017 compared to a maximum one-day loss in fair value of $434 million as of
September 24, 2016. Because the Company uses foreign currency instruments for hedging purposes, the loss in fair value incurred on those instruments are
generally offset by increases in the fair value of the underlying exposures.
Apple Inc. | 2017 Form 10-K | 36
Inventory Valuation, Valuation of Manufacturing-Related Assets and Estimation of Purchase Commitment Cancellation Fees
The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with
certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. In addition,
the Company has entered, and in the future may enter, into foreign currency contracts to partially offset the foreign currency exchange gains and losses on its
foreign-denominated debt issuances. The Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory
purchases, typically for up to 12 months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons,
including but not limited to accounting considerations and the prohibitive economic cost of hedging particular exposures.
Foreign Currency Risk
Further details regarding the Company's debt is provided in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, “Debt."
As of September 30, 2017 and September 24, 2016, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate
carrying amount of $103.7 billion and $78.9 billion, respectively. The Company has entered, and in the future may enter, into interest rate swaps to manage
interest rate risk on its outstanding term debt. Interest rate swaps allow the Company to effectively convert fixed-rate payments into floating-rate payments or
floating-rate payments into fixed-rate payments. Gains and losses on term debt are generally offset by the corresponding losses and gains on the related
hedging instrument. A 100 basis point increase in market interest rates would cause interest expense on the Company's debt as of September 30, 2017 and
September 24, 2016 to increase by $376 million and $271 million on an annualized basis, respectively.
The Company's investment policy and strategy are focused on preservation of capital and supporting the Company's liquidity requirements. The Company uses
a combination of internal and external management to execute its investment strategy and achieve its investment objectives. 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. To provide a meaningful assessment of the interest rate risk
associated with the Company's investment portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates would have
on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 30, 2017 and
September 24, 2016, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $6.0 billion and $4.9 billion incremental
decline in the fair market value of the portfolio, respectively. Such losses would only be realized if the Company sold the investments prior to maturity.
The Company's exposure to changes in interest rates relates primarily to the Company's investment portfolio and outstanding debt. While the Company is
exposed to global interest rate fluctuations, the Company's interest income and expense are most sensitive to fluctuations in U.S. interest rates. Changes in U.S.
interest rates affect the interest earned on the Company's cash, cash equivalents and marketable securities and the fair value of those securities, as well as
costs associated with hedging and interest paid on the Company's debt.
Interest Rate Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of
the U.S. dollar, will negatively affect the Company's net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to
adjust local currency product pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates.
6,500
The Company's investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of
securities are recognized in accumulated other comprehensive income, net of tax, in the Company's Consolidated Balance Sheets. Changes in the fair value of
available-for-sale securities impact the Company's net income only when such securities are sold or an other-than-temporary impairment is recognized.
Realized gains and losses on the sale of securities are determined by specific identification of each security's cost basis. The Company regularly reviews its
investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the
period any such determination is made. In making this determination, the Company evaluates, among other things, the duration and extent to which the fair
value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Company's intent to sell, or whether it will more
likely than not be required to sell, the security before recovery of its amortized cost basis. The Company's assessment of whether a security is other-than-
temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security, which would have an
adverse impact on the Company's financial condition and operating results.
Provision for Income Taxes
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. The
Company will adopt ASU 2016-01 in its first quarter of 2019 utilizing the modified retrospective transition method. Based on the composition of the Company's
investment portfolio, the adoption of ASU 2016-01 is not expected to have a material impact on its consolidated financial statements.
Financial Instruments
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which modifies lease accounting for lessees to increase
transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The
Company will adopt ASU 2016-02 in its first quarter of 2020 utilizing the modified retrospective transition method. While the Company is currently evaluating the
timing and impact of adopting ASU 2016-02, currently the Company anticipates recording lease assets and liabilities in excess of $9.5 billion on its Consolidated
Balance Sheets, with no material impact to its Consolidated Statements of Operations. However, the ultimate impact of adopting ASU 2016-02 will depend on
the Company's lease portfolio as of the adoption date.
Leases
In March 2016, the FASB issued ASU No. 2016-09, Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting ("ASU 2016-09"), which modifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of
awards, and classification in the statement of cash flows. The Company will adopt ASU 2016-09 in its first quarter of 2018. Currently, excess tax benefits or
deficiencies from the Company's equity awards are recorded as additional paid-in capital in its Consolidated Balance Sheets. Upon adoption, the Company will
record any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Operations in the reporting periods in which vesting
occurs. As a result, subsequent to adoption the Company's income tax expense and associated effective tax rate will be impacted by fluctuations in stock price
between the grant dates and vesting dates of equity awards.
-
Stock Compensation
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which
requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company will
adopt ASU 2016-16 in its first quarter of 2019 utilizing the modified retrospective transition method. Currently, the Company anticipates recording up to $9 billion
of net deferred tax assets on its Consolidated Balance Sheets upon adoption. However, the ultimate impact of adopting ASU 2016-16 will depend on the
balance of intellectual property transferred between its subsidiaries as of the adoption date. The Company will recognize incremental deferred income tax
expense thereafter as these deferred tax assets are utilized.
Income Taxes
Apple Inc. | 2017 Form 10-K | 28
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"), which enhances and clarifies
the guidance on the classification and presentation of restricted cash in the statement of cash flows. The Company will adopt ASU 2016-18 in its first quarter of
2019 utilizing the retrospective transition method. Currently, the Company's restricted cash balance is not significant.
Restricted Cash
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-12, Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 expands component and fair value hedging, specifies the
presentation of the effects of hedging instruments, and eliminates the separate measurement and presentation of hedge ineffectiveness. The Company will
adopt ASU 2017-12 in its first quarter of 2020 utilizing the modified retrospective transition method and is currently evaluating the impact of adoption on its
consolidated financial statements.
Hedging
Recent Accounting Pronouncements
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and
2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the "State Aid Decision"). The State Aid Decision orders
Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of
January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and
appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. Although Ireland is still
computing the recovery amount, the Company expects the amount to be in line with the European Commission's announced recovery amount of €13 billion,
plus interest of €1 billion. Once the recovery amount is finalized by Ireland, the Company anticipates funding it, including interest, out of foreign cash. These
amounts are expected to be placed into escrow in 2018, where they will remain pending conclusion of all appeals. The Company believes that any incremental
Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes.
The IRS concluded its review of the years 2010 through 2012 during the third quarter of 2017. All years prior to 2013 are closed, and the IRS is currently
examining the years 2013 through 2015. The Company is also subject to audits by state, local and foreign tax authorities. In major states and major foreign
jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing authorities. 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.
Provision for income taxes
Effective tax rate
2017
2016
2015
$
Valuation and Impairment of Marketable Securities
15,738 $
19,121
24.6%
25.6%
26.4%
The Company's effective tax rates for 2017, 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 in 2017 compared to 2016 was due to a different geographic mix of earnings
and higher U.S. R&D tax credits. The lower effective tax rate in 2016 compared to 2015 was due primarily to greater R&D tax credits.
As of September 30, 2017, the Company had deferred tax assets arising from deductible temporary differences, tax losses and tax credits of $3.9 billion and
deferred tax liabilities of $31.5 billion. Management believes it is more likely than not that forecasted income, including income that may be generated as a
result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax
assets. The Company will continue to evaluate the realizability of deferred tax assets quarterly by assessing the need for and the amount of a valuation
allowance.
15,685 $
8,863
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.
7,750
Other purchase obligations
37,566
-
2,147
2,632
32,787
Manufacturing purchase obligations (1)
9,545
104,021
$
61,391
4,123
1,904
2,295
1,223
Operating leases
$
18,047
Payments Due
Payments Due
in Less Than
1 Year
Payments Due
in 1-3 Years
Payments Due
in 4-5 Years
1,669
in More Than
5 Years
Term debt
$
6,500
$
18,083
$
Total
The following table presents certain payments due by the Company as of September 30, 2017, and excludes amounts already recorded on the Consolidated
Balance Sheet, except for term debt (in millions):
417
6,119
The Company's process for determining ESPs involves management's judgment and considers multiple factors that may vary over time depending upon the
unique facts and circumstances related to each deliverable. Should future facts and circumstances change, the Company's ESPs and the future rate of related
amortization for unspecified software upgrades and non-software services related to future sales of these devices could change. Factors subject to change
include the unspecified software upgrade rights and non-software services offered, the estimated value of unspecified software upgrade rights and non-software
services and the estimated period unspecified software upgrades and non-software services are expected to be provided.
9,220
For sales of qualifying versions of iOS devices, Mac, Apple Watch and Apple TV, the Company has indicated it may from time to time provide future unspecified
software upgrades to the device's essential software and/or non-software services free of charge. Because the Company has neither VSOE nor TPE for the
unspecified software upgrade rights or the non-software services, revenue is allocated to these rights and services based on the Company's ESPs. Revenue
allocated to the unspecified software upgrade rights and non-software services based on the Company's ESPs is deferred and recognized on a straight-line
basis over the estimated period the software upgrades and non-software services are expected to be provided.
For multi-element arrangements that include hardware products containing software essential to the hardware product's functionality, undelivered software
elements that relate to the hardware product's essential software and/or undelivered non-software services, the Company allocates revenue to all deliverables
based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of fair value ("VSOE”), (ii) third-party evidence of selling price ("TPE”) and (iii) best estimate of selling price
("ESP"). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable.
ESPs reflect the Company's best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection
is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For
most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education
customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion
of the risk of loss on these sales during transit. For payment terms in excess of the Company's standard payment terms, revenue is recognized as payments
become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without
concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is
essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting
guidance. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the
hardware.
Revenue Recognition
Management believes the Company's critical accounting policies and estimates are those related to revenue recognition, valuation and impairment of
marketable securities, inventory valuation, valuation of manufacturing-related assets and estimation of purchase commitment cancellation fees, warranty costs,
income taxes, and legal and other contingencies. Management considers these policies critical because they are both important to the portrayal of the
Company's financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The
Company's senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company's
Board of Directors.
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles ("GAAP") and the Company's
discussion and analysis of its financial condition and operating results require the Company's management to make judgments, assumptions and estimates that
affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, "Summary of Significant Accounting Policies," of the Notes
to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the
Company's consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates, and such differences may be material.
Critical Accounting Policies and Estimates
Apple Inc. | 2017 Form 10-K | 32
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to
indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers of the Company and
to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of
payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and
circumstances involved in each claim. While the Company maintains directors and officers liability insurance coverage, such insurance coverage may be
insufficient to cover all losses or all types of claims that may arise.
The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China.
The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain
conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right,
with subsequent changes to the guarantee liability recognized within revenue.
Agreements entered into by the Company sometimes include indemnification provisions which may subject the Company to costs and damages in the event of a
claim against an indemnified third party. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a
material loss, or a material loss in excess of a recorded accrual, with respect to indemnification of third parties.
Indemnification
The Company's other non-current liabilities in the Consolidated Balance Sheets consist primarily of deferred tax liabilities, gross unrecognized tax benefits and
the related gross interest and penalties. As of September 30, 2017, the Company had deferred tax liabilities of $31.5 billion, gross unrecognized tax benefits of
$8.4 billion and an additional $1.2 billion for gross interest and penalties. At this time, the Company is unable to make a reasonably reliable estimate of the
timing of payments due to uncertainties in the timing of tax audit outcomes; therefore, such amounts are not included in the above contractual obligation table.
The Company's other purchase obligations consisted of noncancelable obligations to acquire capital assets, including product tooling and manufacturing
process equipment, and noncancelable obligations related to advertising, licensing, R&D, internet and telecommunications services and other obligations. As of
September 30, 2017, the Company had other purchase obligations of $6.1 billion.
Other Purchase Obligations
Total
$
44,529 $
24,679
$
22,515
14
$
157,251
(1) Represents amount expected to be paid under manufacturing-related supplier arrangements, substantially all of which is noncancelable.
Operating Leases
As of September 30, 2017, the Company's total future minimum lease payments under noncancelable operating leases were $9.5 billion. The Company's retail
store and other facility leases typically have original terms not exceeding 10 years and generally contain multi-year renewal options.
Manufacturing Purchase Obligations
The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company's products and to perform final assembly and testing of
finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically
covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. As of
September 30, 2017, the Company expects to pay $37.6 billion under manufacturing-related supplier arrangements, substantially all of which is noncancelable.
65,528 $
Apple Inc. | 2017 Form 10-K | 31
4,019
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained
interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other
obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in
leasing, hedging, or R&D services with the Company.
1,874
$
18,001
$
15,000
12,769 $
$
Total
of Equity Awards
Taxes Related to
Settlement
Open Market
Share Repurchases
Accelerated Share
Repurchases
Paid
Total
2012
2013
2014
10,297
Thereafter
61,391
Total term debt
$
104,021
$
Further information regarding the Company's debt issuances and related hedging activity can be found in Part II, Item 8 of this Form 10-K in the Notes to
Consolidated Financial Statements in Note 2, "Financial Instruments" and Note 6, "Debt."
In May 2017, the Company's Board of Directors increased the total capital return program from $250 billion to $300 billion, which included an increase in the
share repurchase authorization from $175 billion to $210 billion of the Company's common stock. Additionally, the Company announced that the Board of
Directors raised the Company's quarterly cash dividend from $0.57 to $0.63 per share, beginning with the dividend paid during the third quarter of 2017. The
Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.
As of September 30, 2017, $166 billion of the share repurchase program had been utilized. The Company's share repurchase program does not obligate it to
acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under
plans complying with Rule 10b5-1 under the Exchange Act.
The following table presents the Company's dividends, dividend equivalents, share repurchases and net share settlement activity from the start of the capital
return program in August 2012 through September 30, 2017 (in millions):
2017
2016
2015
Capital Return Program
47,644
Dividends and
Dividend Equivalents
60,658 $
The Company expects to execute its capital return program by the end of March 2019 by paying dividends and dividend equivalents, repurchasing shares and
remitting withheld taxes related to net share settlement of restricted stock units. The Company plans to continue to access the domestic and international debt
markets to assist in funding its capital return program.
12,150
233,874
2,544
56
7,239 $
$
98,027
$
67,950
Off-Balance Sheet Arrangements and Contractual Obligations
$
2,488
34,596
1,082
13,950
9,000
57,284
12,000
17,000
1,570
42,720
11,561
10,564
30,026
6,000
49,086
11,126
21,000
24,000
1,158
1,499
Apple Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Net sales
Gross margin
Cost of sales
Apple Inc. | 2017 Form 10-K | 38
229,234
68
70
44
43
42
(In millions, except number of shares which are reflected in thousands and per share amounts)
41
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Operating expenses:
Years ended
September 24,
2016
Selling, general and administrative
40
$
September 30,
2017
Cash dividends declared per share
Basic
Diluted
Shares used in computing earnings per share:
Research and development
Basic
Diluted
Net income
Provision for income taxes
Income before provision for income taxes
Other income/(expense), net
Operating income
Total operating expenses
Earnings per share:
39
(814)
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
$
(241)
Payments for strategic investments, net
(344)
Payments for acquisition of intangible assets
(11,247)
(12,734)
(12,451)
Payments for acquisition of property, plant and equipment
(343)
(297)
(329)
Payments made in connection with business acquisitions, net
107,447
90,536
94,564
Proceeds from sales of marketable securities
Selected Quarterly Financial Information (Unaudited)
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2017, September 24, 2016 and September 26, 2015
Consolidated Statements of Cash Flows for the years ended September 30, 2017, September 24, 2016 and September 26, 2015
Notes to Consolidated Financial Statements
Consolidated Statements of Operations for the years ended September 30, 2017, September 24, 2016 and September 26, 2015
Consolidated Statements of Comprehensive Income for the years ended September 30, 2017, September 24, 2016 and September 26, 2015
Consolidated Balance Sheets as of September 30, 2017 and September 24, 2016
Index to Consolidated Financial Statements
Financial Statements and Supplementary Data
Item 8.
Page
81,266
(142,428)
(166,402)
Proceeds from maturities of marketable securities
31,775
21,258
14,538
(159,486)
215,639
$
141,048
1.98
$
2.18
$
2.40
5,753,421
5,793,069
See accompanying Notes to Consolidated Financial Statements.
5,470,820
5,500,281
9.22
8.31 $
$
9.21
9.28
$
5,217,242
5,251,692
8.35
Apple Inc. | 2017 Form 10-K | 39
Other comprehensive income/(loss):
Other
September 26,
2015
224
45,687
$
48,351
Net income
$
September 30,
2017
Change in unrealized gains/losses on derivative instruments:
Change in foreign currency translation, net of tax effects of $(77), $8 and $201,
respectively
(In millions)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Apple Inc.
Years ended
September 24,
2016
$
9.27 $
53,394
26,842
14,329
14,194
15,261
8,067
10,045
24,239
11,581
140,089
233,715
September 26,
2015
84,263
88,186
131,376
93,626
$
22,396
60,024
$
45,687
48,351 $
$
19,121
15,685
61,344
15,738
61,372
64,089
1,285
1,348
2,745
71,230
72,515
(395)
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of
the gain or loss on the derivative instrument is reported as a component of AOCI in shareholders' equity and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in
earnings in the current period. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash
flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness
and are recognized in earnings.
220
Denominator:
Net income
Numerator:
The following table shows the computation of basic and diluted earnings per share for 2017, 2016 and 2015 (net income in millions and shares in thousands):
Apple Inc. | 2017 Form 10-K | 46
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 unvested RSUs, unvested restricted stock, outstanding stock options
and shares to be purchased by employees under the Company's employee stock purchase plan. 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.
Earnings Per Share
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 5, "Income Taxes" for additional information.
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which
those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount
that is believed more likely than not to be realized.
Income Taxes
The Company recognizes expense related to share-based payment transactions in which it receives employee services in exchange for (a) equity instruments of
the Company or (b) liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity
instruments. Share-based compensation expense for restricted stock units ("RSUS") and restricted stock is measured based on the closing fair market value of
the Company's common stock on the date of grant. The Company estimates forfeitures expected to occur and recognizes share-based compensation expense
for those equity awards expected to vest. The Company recognizes share-based compensation expense over the award's requisite service period on a straight-
line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance conditions. The Company recognizes a
benefit from share-based compensation in the Consolidated Statements of Shareholders' Equity if an excess tax benefit is realized. In addition, the Company
recognizes the indirect effects of share-based compensation on R&D tax credits, foreign tax credits and domestic manufacturing deductions in the Consolidated
Statements of Operations. Further information regarding share-based compensation can be found in Note 9, "Benefit Plans."
Share-based Compensation
Advertising costs are expensed as incurred and included in selling, general and administrative expenses.
Advertising Costs
Research and development ("R&D") costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are
subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to
customers. In most instances, the Company's products are released soon after technological feasibility has been established and as a result software
development costs were expensed as incurred.
Software Development Costs
The Company generally provides for the estimated cost of hardware and software warranties in the period the related revenue is recognized. The Company
assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates.
Apple Inc. | 2017 Form 10-K | 45
The Company's fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company's fiscal year 2017 included 53 weeks and
ended on September 30, 2017. A 14th week was included in the first fiscal quarter of 2017, as is done every five or six years, to realign the Company's fiscal
quarters with calendar quarters. The Company's fiscal years 2016 and 2015 ended on September 24, 2016 and September 26, 2015, respectively, and
spanned 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company's fiscal years ended in
September and the associated quarters, months and periods of those fiscal years.
Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection
is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For
most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education
customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion
of the risk of loss on these sales during transit. For payment terms in excess of the Company's standard payment terms, revenue is recognized as payments
become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without
concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is
essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting
guidance. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the
hardware.
For the sale of most third-party products, the Company recognizes revenue based on the gross amount billed to customers because the Company establishes
its own pricing for such products, retains related inventory risk for physical products, is the primary obligor to the customer and assumes the credit risk for
amounts billed to its customers. For third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes
Store, the Company does not determine the selling price of the products and is not the primary obligor to the customer. Therefore, the Company accounts for
such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that is
remitted by the Company to third-party app developers and certain digital content owners is not reflected in the Company's Consolidated Statements of
Operations.
Apple Inc. | 2017 Form 10-K | 44
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts
that have been deferred for unspecified and specified software upgrade rights and non-software services that are attached to hardware and software products.
The Company sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on iTunes Store, App Store, Mac App Store, TV
App Store and iBooks Store for the purchase of digital content and software. The Company records deferred revenue upon the sale of the card, which is relieved
upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage
periods. AppleCare service and support contracts typically include extended phone support, repair services, web-based support resources and diagnostic tools
offered under the Company's standard limited warranty.
Weighted-average shares outstanding
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions
involving price protection, the Company recognizes revenue net of the estimated amount to be refunded. For the Company's other customer incentive programs,
the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is
offered. The Company also records reductions to revenue for expected future product returns based on the Company's historical experience. Revenue is
recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted
to the relevant government authority.
For multi-element arrangements that include hardware products containing software essential to the hardware product's functionality, undelivered software
elements that relate to the hardware product's essential software, and undelivered non-software services, the Company allocates revenue to all deliverables
based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE”) and (iii) best estimate of selling price
("ESP"). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable.
ESPs reflect the Company's best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element
arrangements accounted for in accordance with industry-specific software accounting guidance, the Company allocates revenue to all deliverables based on the
VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
For sales of qualifying versions of iPhone, iPad, iPod touch, Mac, Apple Watch and Apple TV, the Company has indicated it may from time to time provide future
unspecified software upgrades to the device's essential software and/or non-software services free of charge. The Company has identified up to three
deliverables regularly included in arrangements involving the sale of these devices. The first deliverable, which represents the substantial portion of the allocated
sales price, is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the
embedded right included with qualifying devices to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the product's
essential software. The third deliverable is the non-software services to be provided to qualifying devices. The Company allocates revenue between these
deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based
on the Company's ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale, provided the other
conditions for revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and the non-software services is
deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. Cost
of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to
provide non-software services are recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating
expenses as incurred.
The Company's process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts
and circumstances related to each deliverable including, where applicable, prices charged by the Company and market trends in the pricing for similar offerings,
product-specific business objectives, estimated cost to provide the non-software services and the relative ESP of the upgrade rights and non-software services
as compared to the total selling price of the product.
Shipping Costs
Amounts billed to customers related to shipping and handling are classified as revenue, and the Company's shipping and handling costs are classified as cost of
sales.
Warranty Costs
Revenue Recognition for Arrangements with Multiple Deliverables
Effect of dilutive securities
Weighted-average diluted shares
2017
6969
9.28
9.22
Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share.
Financial Instruments
Cash Equivalents and Marketable Securities
8.31 $
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company's marketable debt
and equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at
the time of purchase and reevaluates the classifications at each balance sheet date. The Company classifies its marketable debt securities as either short-term
or long-term based on each instrument's underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as
short-term and marketable debt securities with maturities greater than 12 months are classified as long-term. Marketable equity securities, including mutual
funds, are classified as either short-term or long-term based on the nature of each security and its availability for use in current operations. The Company's
marketable debt and equity securities are carried at fair value, with unrealized gains and losses, net of taxes, reported as a component of accumulated other
comprehensive income/(loss) ("AOCI") in shareholders' equity, with the exception of unrealized losses believed to be other-than-temporary which are reported in
earnings in the current period. The cost of securities sold is based upon the specific identification method.
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
53,394
For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges, both the
net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings in the current period.
For derivative instruments and foreign currency debt that hedge the exposure to changes in foreign currency exchange rates used for translation of the net
investment in a foreign operation and that are designated as a net investment hedge, the net gain or loss on the effective portion of the derivative instrument is
reported in the same manner as a foreign currency translation adjustment. For forward exchange contracts designated as net investment hedges, the Company
excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to
this forward carry component are recognized in earnings in the current period.
Derivatives that do not qualify as hedges are adjusted to fair value through earnings in the current period.
Apple Inc. | 2017 Form 10-K | 47
Derivative Financial Instruments
The accompanying 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 consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary
for fair financial statement presentation. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting
principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ materially from those estimates. Certain prior period amounts in the consolidated financial statements have been
reclassified to conform to the current period's presentation.
8.35 $
$
2016
2015
$
48,351 $
45,687
$
9.27 $
9.21 $
53,394
34,450
5,251,692
5,470,820
29,461
5,500,281
5,753,421
39,648
5,793,069
Basic earnings per share
$
Diluted earnings per share
5,217,242
Basis of Presentation and Preparation
Apple Inc. and its wholly-owned subsidiaries (collectively "Apple" or the "Company") designs, manufactures and markets mobile communication and media
devices and personal computers, 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, 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
"Digital Content and 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 retail and online stores. The Company sells to consumers, small and mid-sized
businesses and education, enterprise and government customers.
Notes to Consolidated Financial Statements
Payments for dividends and dividend equivalents
(12,769)
(12,150)
(11,561)
Repurchases of common stock
(32,900)
(1,499)
(29,722)
Proceeds from issuance of term debt, net
28,662
24,954
27,114
Repayments of term debt
(3,500)
(35,253)
(2,500)
(1,570)
Payments for taxes related to net share settlement of equity awards
(110)
Cash used in investing activities
(46,446)
(45,977)
(26)
(56,274)
Financing activities:
(1,874)
Proceeds from issuance of common stock
495
543
Excess tax benefits from equity awards
627
407
749
555
(1,388)
Change in commercial paper, net
Increase/(Decrease) in cash and cash equivalents
11,591
$
10,444 $
13,252
$
2,092
$
$
$
514
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2017 Form 10-K | 43
Note 1 - Summary of Significant Accounting Policies
Apple Inc.
1,316
Cash used in financing activities
Cash paid for interest
Supplemental cash flow disclosure:
3,852
(17,347)
(397)
(20,483)
2,191
(17,716)
(195)
(636)
Cash paid for income taxes, net
7,276
$
20,289
$
20,484
$
21,120
Cash and cash equivalents, end of the year
75
2,836
Change in fair value of derivatives, net of tax benefit/(expense) of $(478), $(7) and
$(441), respectively
Net income
379
128,249
634
96,364
31,251
5,336,166
Balances as of September 24, 2016
379
Tax benefit from equity awards, including transfer
pricing adjustments
(1,225)
(419)
(806)
37,022
Common stock issued, net of shares withheld for
employee taxes
4,262
48,351
48,351
Other comprehensive income/(loss)
(784)
(1,494)
(581)
(913)
36,531
Common stock issued, net of shares withheld for
employee taxes
4,909
4,909
4,262
Share-based compensation
(33,001)
(246,496)
Repurchase of common stock
(12,803)
(12,803)
Dividends and dividend equivalents declared
(784)
(33,001)
Share-based compensation
(29,000)
(29,000)
(840)
3,586
(36,026)
(11,627)
(1,427)
(1,427)
53,394
Tax benefit from equity awards, including transfer
pricing adjustments
53,394
$
1,082
$
87,152
$
23,313
5,866,161 $
111,547
Tax benefit from equity awards, including transfer
pricing adjustments
748
Balances as of September 26, 2015
(279,609)
Repurchase of common stock
(12,188)
(12,188)
Dividends and dividend equivalents declared
979
979
748
Other comprehensive income/(loss)
45,687
Net income
119,355
(345)
92,284
27,416
5,578,753
45,687
Balances as of September 30, 2017
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2017 Form 10-K | 42
(2,093)
385
486
(166)
1,382
4,938
5,966
527
3,586
4,840
11,257
10,505
10,157
53,394
45,687
48,351
4,210
13,844
417
217
9,058
(2,033)
(154)
1,042
(1,554)
(626)
5,001
(2,723)
1,837
(283)
1,055
(5,318)
(3,735)
(51)
(4,254)
(238)
9,618
Equity
$
$
Share-based compensation expense
Depreciation and amortization
Adjustments to reconcile net income to cash generated by operating activities:
Net income
Operating activities:
Cash and cash equivalents, beginning of the year
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Deferred income tax expense
Apple Inc.
$
(150)
$
98,330
620
620
35,867 $
5,126,201 $
134,047
21,120
Other
Accounts receivable, net
20,484
$
September 26,
2015
2016
September 24,
September 30,
2017
Years ended
Changes in operating assets and liabilities:
Purchases of marketable securities
Cash generated by operating activities
Other current and non-current liabilities
Deferred revenue
Accounts payable
Other current and non-current assets
Vendor non-trade receivables
Inventories
Investing activities:
Total Shareholders'
Comprehensive
Income/(Loss)
Retained
Earnings
Accrued expenses
Accounts payable
Current liabilities:
Total assets
Other non-current assets
Acquired intangible assets, net
Property, plant and equipment, net
Goodwill
Deferred revenue
Long-term marketable securities
Other current assets
Vendor non-trade receivables
Inventories
Accounts receivable, less allowances of $58 and $53, respectively
Short-term marketable securities
Cash and cash equivalents
Current assets:
Total current assets
(In millions, except number of shares which are reflected in thousands and par value)
Commercial paper
Total current liabilities
September 30,
2017
Apple Inc. | 2017 Form 10-K | 41
See accompanying Notes to Consolidated Financial Statements.
Total liabilities and shareholders' equity
Total shareholders' equity
Accumulated other comprehensive income/(loss)
Retained earnings
Current portion of long-term debt
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized;
5,126,201 and 5,336,166 shares issued and outstanding, respectively
LIABILITIES AND SHAREHOLDERS' EQUITY:
ASSETS:
Commitments and contingencies
Total liabilities
Other non-current liabilities
Long-term debt
Deferred revenue, non-current
Shareholders' equity:
September 24,
2016
CONSOLIDATED BALANCE SHEETS
Apple Inc. | 2017 Form 10-K | 40
(483)
1,582
(782)
Change in fair value of marketable securities, net of tax benefit/(expense) of $425,
$(863) and $264, respectively
Change in unrealized gains/losses on marketable securities:
(592)
(734)
Adjustment for net (gains)/losses realized and included in net income, net of tax
expense/(benefit) of $35, $(31) and $(32), respectively
(162)
(3,497)
(741)
(1,477)
Adjustment for net (gains)/losses realized and included in net income, net of tax
expense/(benefit) of $475, $131 and $630, respectively
2,905
7
1,315
Total change in unrealized gains/losses on derivative instruments, net of tax
Apple Inc.
(64)
59
See accompanying Notes to Consolidated Financial Statements.
51,967
$
46,666
$
47,567
$
56
(1,427)
(784)
Total comprehensive income
Total other comprehensive income/(loss)
(424)
1,638
(846)
Total change in unrealized gains/losses on marketable securities, net of tax
979
(411)
$
20,484
Apple Inc.
321,686
375,319 $
$
128,249
134,047
634
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except number of shares which are reflected in thousands)
(150)
98,330
35,867
193,437
241,272
36,074
40,415
75,427
31,251
96,364
97,207
Balances as of September 27, 2014
Other comprehensive income/(loss)
Amount
Shares
Accumulated Other
Common Stock and
Additional Paid-In Capital
(609)
(231)
37,624
Net income
employee taxes
3,586
Share-based compensation
(36,026)
(325,032)
Repurchase of common stock
(11,627)
Dividends and dividend equivalents declared
Common stock issued, net of shares withheld for
20,289 $
2,930
100,814
27,010
33,783
170,430
194,714
106,869
128,645
8,283
5,717
13,936
17,799
2,132
4,855
15,754
17,874
46,671
53,892
13,545
79,006
5,414
3,206
3,500
6,496
8,105
11,977
8,080
7,548
22,027
2,298
25,744
49,049 $
$
321,686
375,319 $
$
8,757
10,162
37,294
63,598
65,824
$
Derivative assets (1):
The Company records all derivatives in the 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 September 30, 2017 and
September 24, 2016 (in millions):
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. As a result, the Company recognized a gain of $20 million in net sales, a loss of $40 million in cost of sales and a gain of $606 million in other
income/(expense), net for 2017.
Non-Designated Derivatives
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.
Fair Value Hedges
The effective portions of net investment hedges are recorded in other comprehensive income/(loss) ("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.
Net Investment Hedges
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 into other income/(expense), net in the period of de-designation. 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.
Foreign exchange contracts
The effective portions of cash flow hedges are recorded in 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.
The Company may enter into foreign currency swaps to manage currency risk on its foreign currency-denominated term debt. These instruments may offset a
portion of the foreign currency remeasurement gains or losses on the Company's term debt and related interest payments. The Company designates these
instruments as cash flow hedges. The Company's hedged term debt-related foreign currency transactions as of September 30, 2017 are expected to be
recognized within 25 years.
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 September 30, 2017 are expected to be recognized within 10 years.
The Company may also enter into non-designated foreign currency contracts to partially offset the foreign currency exchange gains and losses generated by the
remeasurement of certain assets and liabilities denominated in non-functional currencies.
Apple Inc. | 2017 Form 10-K | 50
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.
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.
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.
Derivative Financial Instruments
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
September 30, 2017, the Company does not consider any of its investments to be other-than-temporarily impaired.
Cash Flow Hedges
$
Interest rate contracts
$
$
363
Fair Value
Total
Fair Value of
Derivatives Not Designated
as Hedge Instruments
2017
ᏌᏊ Ꭿ
$
759
303
$
218
$
1,049
Apple Inc. | 2017 Form 10-K | 51
as Hedge Instruments
Fair Value of
Derivatives Designated
$
$
Interest rate contracts
Foreign exchange contracts
Derivative liabilities (2):
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.
1,412
170,430
$
956
Municipal securities
112,528
19,599
242
132,369
(206)
1,409
131,166
5
Corporate securities
2,468
7,433
1,593
3,897
1,108
6,598
6,913
818
110
4,965
961
167
794
20,484
$ 237,585 $
(411)
$
2,186
$
$ 235,810
Total
170,430
45,410
8,217
19,253
31
19,284
224,057
(28)
(265)
2,186
222,136
Subtotal
178
19,134
Mortgage- and asset-backed securities
46,671 $
7,841
$
$
3,592
$
109
$
1,797
$
2015
2016
2017
7
Apple Inc. | 2017 Form 10-K | 52
Fair value hedges:
Gains/(Losses) related to hedged items:
Interest rate contracts
Fair value hedges:
Gains/(Losses) on derivative instruments:
Total
Interest rate contracts
Foreign exchange contracts
Cash flow hedges:
Fixed-rate debt
(57)
(111)
$
$
(2)
4,092
885 $
$
1,958
$
96
(258) $
67 $
$
(71)
(258)
67
167
$
$
3,481
52 $
$
1,804
Gains/(Losses) reclassified from AOCI into net income - effective portion:
218
Total
Foreign exchange contracts
$
728
$
518
as Hedge Instruments
Derivatives Designated
Fair Value of
$
$
935
$
Foreign exchange contracts
Derivative liabilities (2):
Interest rate contracts
Foreign exchange contracts
Derivative assets (1):
- $ 303
1,260
67 67
501 $
Interest rate contracts
$
7
$
Net investment hedges:
Total
Interest rate contracts
Foreign exchange contracts
Cash flow hedges:
Gains/(Losses) recognized in OCI - effective portion:
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 in OCI and the Consolidated Statements of Operations for 2017, 2016 and 2015 (in millions):
(2) The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses and other non-current liabilities in the
Consolidated Balance Sheets.
(1) The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-current assets in the
Consolidated Balance Sheets.
$
1,069
– $ 7
134
- $ 728
671
$
153
Fair Value
Total
as Hedge Instruments
Derivatives Not Designated
Fair Value of
2016
Foreign currency debt
(27)
2,356
2,441
36,989
17,228
865
55,082
(230)
58
55,254
U.S. Treasury securities
$
U.S. agency securities
Securities
Long-Term
711
6,534
7,245
(88)
711
711
(88)
6,534
Marketable
5,162
2
(9)
3,640
3,640
Commercial paper
772
3,918
1,142
5,832
5,832
Certificates of deposit and time deposits
7,868
123
9
8,000
(37)
210
7,827
Non-U.S. government securities
1,659
2,057
1,439
5,155
6,534
2,146
7,333
6,534
Cash, Cash Equivalents and Marketable Securities
Note 2 - Financial Instruments
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end
of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses
from these translations are recognized in foreign currency translation included in AOCI in shareholders' equity. The Company's subsidiaries that use the U.S.
dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and
nonmonetary assets and liabilities at historical rates.
Foreign Currency Translation and Remeasurement
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value.
The Company has not elected the fair value option for any eligible financial instruments.
The Company's valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted
prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of the Company's debt instruments and all
other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model-driven valuations
using significant inputs derived from or corroborated by observable market data.
Apple Inc. | 2017 Form 10-K | 48
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities
in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants would use in pricing the
asset or liability.
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and
liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact
and the market-based risk measurements or assumptions that market participants would use to price the asset or liability, such as risks inherent in valuation
techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value
into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
The following tables show the Company's cash and available-for-sale securities by significant investment category as of September 30, 2017 and September 24,
2016 (in millions):
Fair Value Measurements
The Company does not amortize goodwill and intangible assets with indefinite useful lives; rather, such assets are required to be tested for impairment at least
annually or sooner if events or changes in circumstances indicate that the assets may be impaired. The Company performs its goodwill and intangible asset
impairment tests in the fourth quarter of each year. The Company did not recognize any impairment charges related to goodwill or indefinite lived intangible
assets during 2017, 2016 and 2015. For purposes of testing goodwill for impairment, the Company established reporting units based on its current reporting
structure. Goodwill has been allocated to these reporting units to the extent it relates to each reporting unit. In 2017 and 2016, the Company's goodwill was
primarily allocated to the Americas and Europe reporting units.
The Company reviews property, plant and equipment, inventory component prepayments and identifiable intangibles, excluding goodwill and intangible assets
with indefinite useful lives, for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash
flows the assets are expected to generate. If property, plant and equipment, inventory component prepayments and certain identifiable intangibles are
considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value.
Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets
Property, plant and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets,
which for buildings is the lesser of 30 years or the remaining life of the underlying building; between one and five years for machinery and equipment, including
product tooling and manufacturing process equipment; and the shorter of lease term or useful life for leasehold improvements. The Company capitalizes eligible
costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to internal-use software
are amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization
expense on property and equipment was $8.2 billion, $8.3 billion and $9.2 billion during 2017, 2016 and 2015, respectively.
Property, Plant and Equipment
Inventories are stated at the lower of cost, computed using the first-in, first-out method, and net realizable value. Any adjustments to reduce the cost of
inventories to their net realizable value are recognized in earnings in the current period.
Inventories
The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts
receivable balances, credit quality of the Company's customers, current economic conditions and other factors that may affect the customers' abilities to pay.
Allowance for Doubtful Accounts
The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The Company
typically amortizes its acquired intangible assets with definite useful lives over periods from three to seven years.
Cash
Level 1:
Money market funds
-
$
7,982
$
7,982
$
$
7,982 $
$
Marketable
Securities
Short-Term
Cash and
Cash
Equivalents
Value
Fair
Unrealized
Losses
Unrealized
Gains
Adjusted
Cost
2017
Subtotal
Level 2:
Mutual funds
799
1,494
Corporate securities
152,724
1,261
(146)
3,666
3,666
5,073
1,407
3,666
8,601 $ - $ -
8,601 $
1,261
$ - $ - $
$
Securities
Marketable
Long-Term
Securities
Marketable
Short-Term
Cash and
Cash
Equivalents
Fair
Value
8,601
(146)
4,927
3,666
2,762
7,559
26,993
13,492
1,527
42,012
(4)
$ |8| |
7,433
Commercial paper
6,598
Certificates of deposit and time deposits
259
7,609
Non-U.S. government securities
7,543
U.S. agency securities
319
41,697
U.S. Treasury securities
1,261
Losses
Gains
Cost
Unrealized
1,278
253,084
Subtotal
21,544
(175)
35
21,684
Mortgage- and asset-backed securities
850
114
964
(1)
4
961
Municipal securities
125,688
27,591
172
153,451
(242)
969
(694)
1,956
253,668
656
53,181
Unrealized
Adjusted
2016
Level 2:
Subtotal
Mutual funds
Money market funds
Level 1:
Cash
Apple Inc. | 2017 Form 10-K | 49
194,714
53,892 $
20,289 $
$ 268,895 $
(782)
1,278 $
$
$ 268,399
Total
194,714
20,888
5,773
$
16
(17)
$
2015
2016
2017
Effective tax rate
Provision for income taxes
Other
Research and development credit, net
Domestic production activities deduction
Indefinitely invested earnings of foreign subsidiaries
State taxes, net of federal effect
Computed expected tax
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35% in 2017, 2016 and 2015)
to income before provision for income taxes for 2017, 2016 and 2015, is as follows (dollars in millions):
Apple Inc. | 2017 Form 10-K | 55
As of September 30, 2017 and September 24, 2016, $252.3 billion and $216.0 billion, respectively, of the Company's cash, cash equivalents and marketable
securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally
subject to U.S. income taxation on repatriation to the U.S.
The foreign provision for income taxes is based on foreign pre-tax earnings of $44.7 billion, $41.1 billion and $47.6 billion in 2017, 2016 and 2015,
respectively. The Company's consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to
be indefinitely reinvested outside the U.S. Substantially all of the Company's undistributed international earnings intended to be indefinitely reinvested in
operations outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5% . As of September 30, 2017, U.S.
income taxes have not been provided on a cumulative total of $128.7 billion of such earnings. The amount of unrecognized deferred tax liability related to these
temporary differences is estimated to be $42.2 billion.
(1) Includes taxes of $7.9 billion, $6.7 billion and $7.3 billion provided on foreign pre-tax earnings in 2017, 2016 and 2015, respectively.
22,431
19,121
21,480
25,380
15,738
24.6%
$
128
(13)
144
(171)
(371)
(678)
(426)
(382)
(209)
(6,470)
(5,582)
(6,135)
680
553
185
$
$
15,685 $
2,138
3,408
11,730
7,652 $
5,043
5,980
7,842 $
2015
2,198
$
69
131
222
323
505
948
2016
$
$
13,822
2,938
12,695
259
(1,806)
33
4,744
2,105
$
15,738
1,655
(16)
1,671
1,045
852
261
(220)
(138)
2
1,265
990
15,138
15,685
$
19,121
(952)
2,056
1,121
333
4,033
$
6,900
7,724
$
2015
2016
2017
Increases related to tax positions taken during a prior year
Decreases related to tax positions taken during a prior year
Increases related to tax positions taken during the current year
Decreases related to settlements with taxing authorities
Decreases related to expiration of statute of limitations
Ending balances
Beginning balances
The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2017, 2016 and 2015, is as follows (in
millions):
Apple Inc. | 2017 Form 10-K | 56
As of September 30, 2017, the total amount of gross unrecognized tax benefits was $8.4 billion, of which $2.5 billion, if recognized, would affect the
Company's effective tax rate. As of September 24, 2016, the total amount of gross unrecognized tax benefits was $7.7 billion, of which $2.8 billion, if
recognized, would have affected the Company's effective tax rate.
(257)
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon
examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the
financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The
Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as
non-current liabilities in the Consolidated Balance Sheets.
(345)
1,578
(11)
874 $
Apple Inc. | 2017 Form 10-K | 57
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by providing tax opinions in 1991 and
2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the Company (the "State Aid Decision"). The State Aid Decision orders
Ireland to calculate and recover additional taxes from the Company for the period June 2003 through December 2014. Irish legislative changes, effective as of
January 2015, eliminated the application of the tax opinions from that date forward. The Company believes the State Aid Decision to be without merit and
appealed to the General Court of the Court of Justice of the European Union. Ireland has also appealed the State Aid Decision. Although Ireland is still
computing the recovery amount, the Company expects the amount to be in line with the European Commission's announced recovery amount of €13 billion,
plus interest of €1 billion. Once the recovery amount is finalized by Ireland, the Company anticipates funding it, including interest, out of foreign cash. These
amounts are expected to be placed into escrow in 2018, where they will remain pending conclusion of all appeals. The Company believes that any incremental
Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes.
The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax
audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with its expectations, the
Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of
audits is not certain, the Company does not believe it is reasonably possible that its gross unrecognized tax benefits would materially change in the next 12
months.
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal
Revenue Service (the "IRS") concluded its review of the years 2010 through 2012 during the third quarter of 2017. All years prior to 2013 are closed, and the
IRS is currently examining the years 2013 through 2015. The Company is also subject to audits by state, local and foreign tax authorities. In major states and
major foreign jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing authorities.
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of September 30, 2017 and
September 24, 2016, the total amount of gross interest and penalties accrued was $1.2 billion and $1.0 billion, respectively, which is classified as non-current
liabilities in the Consolidated Balance Sheets. In connection with tax matters, the Company recognized interest and penalty expense in 2017, 2016 and 2015 of
$165 million, $295 million and $709 million, respectively.
6,900
$
7,724
8,407 $
$
(13)
(39)
(109)
(1,618)
(539)
1,278
1,880
Uncertain Tax Positions
Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled.
(21,906)
$
Net deferred tax liabilities
Total deferred tax liabilities
Other
Unremitted earnings of foreign subsidiaries
Deferred tax liabilities:
Total deferred tax assets, net of valuation allowance of $0
Other
Share-based compensation
Deferred cost sharing
Deferred revenue
Basis of capital assets
Accrued liabilities and other reserves
Deferred tax assets:
The Company's income taxes payable have been reduced by the tax benefits from employee stock plan awards. For RSUs, the Company receives an income
tax benefit upon the award's vesting equal to the tax effect of the underlying stock's fair market value. The Company had net excess tax benefits from equity
awards of $620 million, $379 million and $748 million in 2017, 2016 and 2015, respectively, which were reflected as increases to common stock.
As of September 30, 2017 and September 24, 2016, the significant components of the Company's deferred tax assets and liabilities were (in millions):
26.4%
25.6%
2017
2016
4,019 $
4,135
(27,588) $
$
31,921
485
207
36,562
31,436
10,015
8,974
Provision for income taxes
788
601
703
667
667
1,717
1,521
2,107
1,230
834
Total
36,355
Current
Total other non-current liabilities
Other non-current liabilities
Deferred tax liabilities
Other Non-Current Liabilities
Total property, plant and equipment, net
Accumulated depreciation and amortization
Gross property, plant and equipment
Leasehold improvements
Machinery, equipment and internal-use software
Land and buildings
Property, Plant and Equipment, Net
The following tables show the Company's consolidated financial statement details as of September 30, 2017 and September 24, 2016 (in millions):
Note 3 - Consolidated Financial Statement Details
Apple Inc. | 2017 Form 10-K | 53
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. The Company purchases these components directly from suppliers. As of September 30, 2017
the Company had three vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 42%, 19% and 10%. As
of September 24, 2016, the Company had two vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for
47% and 21%.
Vendor Non-Trade Receivables
As of September 30, 2017, the Company had two customers that individually represented 10% or more of total trade receivables, each of which accounted for
10% As of September 24, 2016, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 10%. The
Company's cellular network carriers accounted for 59% and 63% of trade receivables as of September 30, 2017 and September 24, 2016, respectively.
2017
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers, small
and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers;
however, the Company will require collateral in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade
receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing
arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or
credit risk sharing related to any of these arrangements.
2016
13,587 $
54,210
26,019
$
31,504
$
2016
2017
27,010
33,783 $
$
(34,235)
(41,293)
61,245
6,517
75,076
7,279
44,543
10,185
$
8,911
Trade Receivables
Under master netting arrangements with the respective counterparties to the Company's derivative contracts, the Company is allowed to net settle transactions
with a single net amount payable by one party to the other. As of September 30, 2017 and September 24, 2016, 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
$1.4 billion and $1.5 billion, respectively, resulting in net derivative assets of $32 million and $160 million, respectively.
Instruments not designated as accounting hedges:
Interest rate contracts
Foreign exchange contracts
Instruments designated as accounting hedges:
The following table shows the notional amounts of the Company's outstanding derivative instruments and credit risk amounts associated with outstanding or
unsettled derivative instruments as of September 30, 2017 and September 24, 2016 (in millions):
(337)
(341) $
$
810
$
337
$
341
(810) $
$
Deferred
4,075
Foreign exchange contracts
Accounts Receivable
2017
Notional
Amount
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the
same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or
posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets
and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. The net cash collateral received by the Company related to derivative
instruments under its collateral security arrangements was $35 million and $163 million as of September 30, 2017 and September 24, 2016, respectively, which
were recorded as accrued expenses in the Consolidated Balance Sheets.
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.
153
54,305 $
363 $
69,774 $
$
728
$
518
44,678 $
24,500
1,049 $
218 $
56,156
33,000 $
$
Credit Risk
Amount
Notional
Amount
Credit Risk
Amount
2016
10,055
$
40,415 $
(5,806) $
$
9,012
100
100
2,298 $
(5,309) $
3,106
(5,806) $
Carrying
Amount
Accumulated
Amortization
Net
2016
$
8,912
2,198 $
(5,309) $
Gross
Carrying
Amount
100
3,206
Apple Inc. | 2017 Form 10-K | 54
Amortization expense related to acquired intangible assets was $1.2 billion, $1.5 billion and $1.3 billion in 2017, 2016 and 2015, respectively. As of
September 30, 2017, the remaining weighted-average amortization period for acquired intangible assets is 3.4 years. The expected annual amortization
expense related to acquired intangible assets as of September 30, 2017, is as follows (in millions):
2018
Foreign:
Total
$
Deferred
Current
State:
Total (1)
Current
Deferred
Net
Carrying
Amount
Federal:
The provision for income taxes for 2017, 2016 and 2015, consisted of the following (in millions):
Note 5 Income Taxes
Total
Thereafter
2022
2021
$
2019
2017
Amortization
2020
2017
Total other income/(expense), net
(903)
(1,195)
(733)
(1,456)
2,921
3,999 $
Other expense, net
$
$
Interest and dividend income
2015
2016
2017
Accumulated
36,074
Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for 2017, 2016 and 2015 (in millions):
Interest expense
2,745
5,201 $
(2,323)
(133)
1,348 $
$
$
$
Total acquired intangible assets
100
Indefinite-lived and non-amortizable acquired
7,507 $
$
intangible assets
7,607
Definite-lived and amortizable acquired
Gross
Carrying
Amount
The Company's acquired intangible assets with definite useful lives primarily consist of patents and licenses. The following table summarizes the components of
acquired intangible asset balances as of September 30, 2017 and September 24, 2016 (in millions):
1,285
intangible assets
Note 4 - Acquired Intangible Assets
51,157
3,000
$
111.73
6,000
26,850
November 2016
$
May 2016 ASR
117.29 $
$
(2) Includes 15.6 million shares delivered and retired at the beginning of the purchase period, which began in the third quarter of 2017, and 4.5 million shares delivered
and retired at the end of the purchase period, which concluded in the fourth quarter of 2017.
$
August 2016
April 2016
60,452
$
99.25
6,000
29,122
$
(1) "Number of Shares" represents those shares delivered at the beginning of the purchase period and does not represent the final number of shares to 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
purchase period based on the volume-weighted average price of the Company's common stock during that period. The August 2017 ASR purchase period will end in
November 2017.
February 2017
3,000
103.02
$
November 2015 ASR
3,000
(in millions)
$
Apple Inc. | 2017 Form 10-K | 60
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 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.
The following table shows the Company's ASR activity and related information during the years ended September 30, 2017 and September 24, 2016:
August 2017 ASR
Additionally, the Company repurchased shares of its common stock in the open market, which were retired upon repurchase, during the periods presented as
follows:
May 2017 ASR
Purchase Period
End Date
November 2017
Number of
Shares
(in thousands)
ASR
Average
Repurchase
Price Per Share
Amount
15,069 (1)
(1)
$
3,000
August 2017
20,108 (2) $
149.20
$
3,000
February 2017 ASR
November 2016 ASR
August 2016 ASR
May 2017
20,949
143.20 $
2017:
97.54
Third quarter
104.97 $
3,000
41,238 $
97.00
4,000
71,766 $
7,000
25,984
$
115.45
3,000
167,567
$
17,000
Note 8 - Comprehensive Income
Comprehensive income consists of two components, net income and OCI. OCI refers to revenue, expenses, and gains and losses that under GAAP 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.
Apple Inc. | 2017 Form 10-K | 61
The following table shows the pre-tax amounts reclassified from AOCI into the Consolidated Statements of Operations, and the associated financial statement
line item, for 2017 and 2016 (in millions):
Comprehensive Income Components
Unrealized (gains)/losses on derivative instruments:
Foreign exchange contracts
Interest rate contracts
Unrealized (gains)/losses on marketable securities
Total amounts reclassified from AOCI
In May 2017, the Company's Board of Directors increased the share repurchase authorization from $175 billion to $210 billion of the Company's common stock,
of which $166 billion had been utilized as of September 30, 2017. 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").
2017
Financial Statement Line Item
28,579 $
Fourth quarter
18,001
134,832
Second quarter
First quarter
Total open market common stock repurchases
2016:
Fourth quarter
Third quarter
Second quarter
First quarter
Total open market common stock repurchases
Number of
Shares
(in thousands)
Average
Repurchase
Price Per Share
Amount
(in millions)
29,073 $
154.78
$
4,500
30,356 $
148.24
4,500
31,070 $
128.74
4,001
44,333 $
112.78
5,000
$
Share Repurchase Program
(225)
$
2.55%
-%
2047
1,000
3.78%
―%
104,021
78,384
(93)
(6,496)
$
97,207
2,000
(174)
(3,500)
$
75,427
To manage interest rate risk on certain of its U.S. dollar-denominated fixed- or floating-rate notes, the Company has entered into interest rate swaps to
effectively convert the fixed interest rates to floating interest rates or the floating interest rates to fixed interest rates on a portion of these notes. Additionally, to
manage foreign currency risk on certain of its foreign currency-denominated notes, the Company has entered into foreign currency swaps to effectively convert
these notes to U.S. dollar-denominated notes.
A portion of the Company's Japanese yen-denominated notes is designated as a hedge of the foreign currency exposure of the Company's net investment in a
foreign operation. As of September 30, 2017 and September 24, 2016, the carrying value of the debt designated as a net investment hedge was $1.6 billion and
$1.9 billion, respectively.
For further discussion regarding the Company's use of derivative instruments see the Derivative Financial Instruments section of Note 2, "Financial Instruments."
Apple Inc. | 2017 Form 10-K | 59
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if applicable, adjustments related to
hedging. The Company recognized $2.2 billion, $1.4 billion and $722 million of interest expense on its term debt for 2017, 2016 and 2015, respectively.
The future principal payments for the Company's Notes as of September 30, 2017 are as follows (in millions):
2018
2019
2020
717
2027
-%
1.92%
―%
2016
-%
-%
-%
-%
―%
-%
―%
―%
༈ ༈ ༈ ༈ ༈ ༈
-%
―%
2027
1,000
3.03%
―%
2024
2,017
2.66%
―%
2019
1,000
1.54%
―%
2022
1,000
2021
11,965
2022
6,500
0.63
$
3,252
0.63
3,281
0.57
2,988
0.57
3,042
$
2.40
$
$
12,563
0.57
$
EA
3,071
0.57
3,117
0.52
2,879
0.52
2,898
$
2.18
$
EA
(in millions)
Amount
8,863
9,220
7,750
10,297
61,391
$
104,021
Thereafter
Total term debt
As of September 30, 2017 and September 24, 2016, the fair value of the Company's Notes, based on Level 2 inputs, was $106.1 billion and $81.7 billion
respectively.
Note 7 - Shareholders' Equity
Dividends
The Company declared and paid cash dividends per share during the periods presented as follows:
2017:
Fourth quarter
Third quarter
Second quarter
First quarter
Total cash dividends declared and paid
2016:
Fourth quarter
Third quarter
Second quarter
First quarter
Total cash dividends declared and paid
Future dividends are subject to declaration by the Board of Directors.
Dividends
Per Share
$
Revenue
Accrued Warranty and Indemnification
$
769 $
1,889
575
1,536
1,552
1,475
$
4,840 $
4,210 $
3,586
The income tax benefit related to share-based compensation expense was $1.6 billion, $1.4 billion and $1.2 billion for 2017, 2016 and 2015, respectively. As
of September 30, 2017, the total unrecognized compensation cost related to outstanding RSUs, restricted stock and stock options was $8.1 billion, which the
Company expects to recognize over a weighted-average period of 2.5 years.
Note 10 Commitments and Contingencies
The following table shows changes in the Company's accrued warranties and related costs for 2017, 2016 and 2015 (in millions):
2,299
1,664
2017
2015
Beginning accrued warranty and related costs
$
3,702 $
Cost of warranty claims
Accruals for product warranty
Ending accrued warranty and related costs
(4,322)
4,780 $
(4,663)
4,159
(4,401)
4,454
2016
877 $
$
2015
49,468 $
109.28
(46,313) $
84.44
(5,533) $
96.48
99,089 $
97.54
50,112 $
121.65
(45,735) $
95.48
(5,895) $
106.87
97,571 $
110.33
$
15,038
The fair value as of the respective vesting dates of RSUs was $6.1 billion, $5.1 billion and $4.8 billion for 2017, 2016 and 2015, respectively. The majority of
RSUs that vested in 2017, 2016 and 2015 were net share settled such that the Company withheld shares with value equivalent to the employees' minimum
statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld
were approximately 15.4 million, 15.9 million and 14.1 million for 2017, 2016 and 2015, respectively, and were based on the value of the RSUs on their
respective vesting dates as determined by the Company's closing stock price. Total payments for the employees' tax obligations to taxing authorities were $2.0
billion, $1.7 billion and $1.6 billion in 2017, 2016 and 2015, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash
Flows. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have otherwise been
issued as a result of the vesting and did not represent an expense to the Company.
Share-based Compensation
The following table shows a summary of the share-based compensation expense included in the Consolidated Statements of Operations for 2017, 2016 and
2015 (in millions):
Cost of sales
Research and development
Selling, general and administrative
Total share-based compensation expense
2017
2016
3,585
85.77
5,022
Apple Inc. | 2017 Form 10-K | 66
Total
Thereafter
2022
2021
2020
2019
2018
Rent expense under all operating leases, including both cancelable and noncancelable leases, was $1.1 billion, $939 million and $794 million in 2017, 2016
and 2015, respectively. Future minimum lease payments under noncancelable operating leases having initial or remaining terms in excess of one year as of
September 30, 2017, are as follows (in millions):
Apple Inc. | 2017 Form 10-K | 65
The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not
currently utilize any other off-balance sheet financing arrangements. As of September 30, 2017, the Company's total future minimum lease payments under
noncancelable operating leases were $9.5 billion. The Company's retail store and other facility leases typically have original terms not exceeding 10 years and
generally contain multi-year renewal options.
Operating Leases
Other Off-Balance Sheet Commitments
$
Substantially all of the Company's hardware products are manufactured by outsourcing partners that are located primarily in Asia, with some Mac computers
manufactured in the U.S. and Ireland. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in
single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company's products.
Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company's operating results could be adversely affected if
its outsourcing partners were unable to meet their production commitments. The Company's manufacturing purchase obligations typically cover its requirements
for periods up to 150 days.
The Company uses some custom components that are not commonly used by its competitors, and new products introduced by the Company often utilize
custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the
suppliers' yields have matured or manufacturing capacity has increased. If the Company's supply of components for a new or existing product were delayed or
constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Company's financial condition and operating results
could be materially adversely affected. The Company's business and financial performance could also be materially adversely affected depending on the time
required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of
these components at acceptable prices, or at all, may be affected if those suppliers decide to concentrate on the production of common components instead of
components customized to meet the Company's requirements.
Although most components essential to the Company's business are generally available from multiple sources, a few components are currently obtained from
single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media
devices and personal computers. Therefore, many components used by the Company, including those that are available from multiple sources, are at times
subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Company's financial condition and operating
results.
Concentrations in the Available Sources of Supply of Materials and Product
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to
indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers of the Company and
to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of
payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and
circumstances involved in each claim. While the Company maintains directors and officers liability insurance coverage, such insurance coverage may be
insufficient to cover all losses or all types of claims that may arise.
The Company offers an iPhone Upgrade Program, which is available to customers who purchase a qualifying iPhone in the U.S., the U.K. and mainland China.
The iPhone Upgrade Program provides customers the right to trade in that iPhone for a specified amount when purchasing a new iPhone, provided certain
conditions are met. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right,
with subsequent changes to the guarantee liability recognized within revenue.
Agreements entered into by the Company sometimes include indemnification provisions which may subject the Company to costs and damages in the event of a
claim against an indemnified third party. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a
material loss, or a material loss in excess of a recorded accrual, with respect to indemnification of third parties.
Apple Inc. | 2017 Form 10-K | 64
4,780
3,702 $
$
-%
3,834
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.
1,223
1,187
1,108
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 Consolidated Statement of Operations. On December 6, 2016, the U.S.
Supreme Court remanded the case to the U.S. Court of Appeals for the Federal Circuit for further proceedings related to the $548 million in damages. On
February 7, 2017, the U.S. Court of Appeals for the Federal Circuit remanded the case to the District Court to determine what additional proceedings, if any, are
needed. On October 22, 2017, on remand from the U.S. Supreme Court, the District Court ordered a new trial on damages.
Apple Inc. v. Samsung Electronics Co., Ltd., et al.
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 I, Item 1A of this Form 10-K under the heading "Risk Factors" and in Part I, Item 3 of this Form 10-K under the heading "Legal
Proceedings." 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.
Contingencies
8,677
$
14
1,268
1,296
1,626
2,675
1,798
Total
Thereafter
2022
2021
2020
$
2019
2018
The Company has entered into certain off-balance sheet arrangements which require the future purchase of goods or services ("Unconditional Purchase
Obligations"). The Company's Unconditional Purchase Obligations primarily consist of payments for supplier arrangements, internet and telecommunication
services and intellectual property licenses. Future payments under noncancelable Unconditional Purchase Obligations having a remaining term in excess of one
year as of September 30, 2017, are as follows (in millions):
Unconditional Purchase Obligations
9,545
$
4,123
871
1,033
$
Cost of sales
$
80.34
(464)
$
(345)
2,445
2,526
(872)
87
(785)
Tax effect
8
124
(894)
772 $
14
(762)
75
(734)
1,638
979
Balances as of September 24, 2016
(578)
38
1,174
634
Other comprehensive income/(loss) before reclassifications
301
Amounts reclassified from AOCI
Other comprehensive income/(loss)
67
(653) $
Other comprehensive income/(loss) before reclassifications
Amounts reclassified from AOCI
(662) $
(654)
(865)
(130)
Other income/(expense), net
(638)
111
Other income/(expense), net
2
12
(1,952)
(872)
Other income/(expense), net
(99)
87
$
(2,051) $
(785)
The following table shows the changes in AOCI by component for 2017 and 2016 (in millions):
Cumulative Foreign
Currency
Translation
Unrealized
Gains/Losses
on Derivative
Instruments
Unrealized
Gains/Losses
on Marketable
Securities
Total
Balances as of September 26, 2015
$
1,793
(1,952)
101,467
(1,207)
(99)
Restricted Stock Units
A summary of the Company's RSU activity and related information for 2017, 2016 and 2015, is as follows:
Balance as of September 27, 2014
RSUs granted
RSUS vested
RSUS canceled
Balance as of September 26, 2015
RSUS granted
RSUs vested
RSUs canceled
Balance as of September 24, 2016
RSUS granted
Apple Inc. | 2017 Form 10-K | 63
RSUS vested
Balance as of September 30, 2017
Aggregate Fair Value
(in millions)
Number of
RSUs
(in thousands)
Weighted-Average
Grant Date Fair
Value Per Share
103,822
$
70.98
45,587 $
105.51
(41,684) $
71.32
(6,258) $
RSUs canceled
The Company's 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S.
employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ( $18,000 for calendar year 2017). The Company matches 50%
to 100% of each employee's contributions, depending on length of service, up to a maximum 6% of the employee's eligible earnings.
401(k) Plan
The Employee Stock Purchase Plan (the "Purchase Plan") is a shareholder approved plan under which substantially all employees may purchase the
Company's common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of
six-month offering periods. An employee's payroll deductions under the Purchase Plan are limited to 10% of the employee's compensation and employees may
not purchase more than $25,000 of stock during any calendar year. As of September 30, 2017, approximately 41.5 million shares were reserved for future
issuance under the Purchase Plan.
(2,051)
Tax effect
Other comprehensive income/(loss)
(77)
224
460
380
(162)
(846)
(784)
Balances as of September 30, 2017
$
(354) $
(124) $
328
$
(150)
Note 9 - Benefit Plans
2014 Employee Stock Plan
In the second quarter of 2014, shareholders approved the 2014 Employee Stock Plan (the “2014 Plan") and terminated the Company's authority to grant new
awards under the 2003 Employee Stock Plan (the “2003 Plan”). The 2014 Plan provides for broad-based equity grants to employees, including executive
officers, and permits the granting of RSUs, stock grants, performance-based awards, stock options and stock appreciation rights, as well as cash bonus awards.
RSUs granted under the 2014 Plan generally vest over four years, based on continued employment, and are settled upon vesting in shares of the Company's
common stock on a one-for-one basis. Each share issued with respect to RSUs granted under the 2014 Plan reduces the number of shares available for grant
under the plan by two shares. RSUs canceled and shares withheld to satisfy tax withholding obligations increase the number of shares available for grant under
the 2014 Plan utilizing a factor of two times the number of RSUs canceled or shares withheld. Currently, all RSUs granted under the 2014 Plan have dividend
equivalent rights ("DERS"), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same
vesting and other terms and conditions as the corresponding unvested RSUs. DERS are accumulated and paid when the underlying shares vest. Upon approval
of the 2014 Plan, the Company reserved 385 million shares plus the number of shares remaining that were reserved but not issued under the 2003 Plan. Shares
subject to outstanding awards under the 2003 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations with
respect to RSUs, will also be available for awards under the 2014 Plan. As of September 30, 2017, approximately 327.9 million shares were reserved for future
issuance under the 2014 Plan.
Apple Inc. | 2017 Form 10-K | 62
2003 Employee Stock Plan
The 2003 Plan is a shareholder approved plan that provided for broad-based equity grants to employees, including executive officers. The 2003 Plan permitted
the granting of incentive stock options, nonstatutory stock options, RSUs, stock appreciation rights, stock purchase rights and performance-based awards.
Options granted under the 2003 Plan generally expire seven to ten years after the grant date and generally become exercisable over a period of four years,
based on continued employment, with either annual, semi-annual or quarterly vesting. RSUs granted under the 2003 Plan generally vest over two to four years,
based on continued employment and are settled upon vesting in shares of the Company's common stock on a one-for-one basis. All RSUs, other than RSUs
held by the Chief Executive Officer, granted under the 2003 Plan have DERS. DERS are subject to the same vesting and other terms and conditions as the
corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest. In the second quarter of 2014, the Company terminated the
authority to grant new awards under the 2003 Plan.
1997 Director Stock Plan
The 1997 Director Stock Plan (the "Director Plan") is a shareholder approved plan that (i) permits the Company to grant awards of RSUs or stock options to the
Company's non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic
annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the relative mixture of stock
options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company's common stock subject to
these grants without shareholder approval. Each share issued with respect to RSUs granted under the Director Plan reduces the number of shares available for
grant under the plan by two shares. The Director Plan expires November 9, 2019. All RSUs granted under the Director Plan are entitled to DERS. DERS are
subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERS are accumulated and paid when the underlying shares
vest. As of September 30, 2017, approximately 1.1 million shares were reserved for future issuance under the Director Plan.
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2017, Section 16 officers Angela Ahrendts, Timothy D. Cook, Luca Maestri, Daniel Riccio and Philip Schiller 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.
Employee Stock Purchase Plan
887
―%
3.91%
-%
Maturities
Fixed-rate 1.100% -4.650% notes
Floating-rate notes
2016 debt issuances of $24.9 billion:
Fixed-rate 0.350% -4.375% notes
Floating-rate notes
2015 debt issuances of $27.3 billion:
Fixed-rate 2.100% -4.450% notes
2014 debt issuance of $12.0 billion:
Floating-rate notes
Fixed-rate 1.000% -3.850% notes
Amount
(in millions)
Floating-rate notes
As of September 30, 2017, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $104.0
billion (collectively the "Notes"). The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the U.S. dollar-denominated and
Australian dollar-denominated floating-rate notes, semi-annually for the U.S. dollar-denominated, Australian dollar-denominated, British pound-denominated,
Japanese yen-denominated and Canadian dollar-denominated fixed-rate notes and annually for the euro-denominated and Swiss franc-denominated fixed-rate
notes. The following table provides a summary of the Company's term debt as of September 30, 2017 and September 24, 2016:
Term Debt
(397)
$
3,852
472
(3,160)
3,632
17,932
(12,298)
5,634
(869)
2013 debt issuance of $17.0 billion:
(1,782) $
2017
Amount
1.13%
23,609
4.78%
1.13%
23,645
1.95%
0.91%
1,350
1.08%
12,500
Effective
Interest Rate
2018 2043
2,000
$
1.10%
2,000
$
2018
Interest Rate
Effective
2016
(in millions)
1.10%
$
Total change in commercial paper, net
Proceeds from/(Repayments of) commercial paper, net
2020
1,549
1.56%
1.87%
1,781
0.87%
2019 2045
24,522
0.28%
4.51%
2019
25,144
2019-2021
2018 2046
I
1.87%
4.51%
1,350
1.45%
2.44%
12,500
-%
0.28%
4.48%
0.85%
10,000
Repayments of commercial paper
Proceeds from commercial paper
Maturities greater than 90 days:
Proceeds from/(Repayments of) commercial paper, net
Maturities less than 90 days:
2016
2017
The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2017 and 2016 (in millions):
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 September 30, 2017 and September 24,
2016, the Company had $12.0 billion and $8.1 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 1.20% as of September 30, 2017 and 0.45% as of September 24, 2016.
Commercial Paper
Note 6 Debt
1.08%
3.91%
2019
1,000
1.61%
2,000
0.86%
1.09%
2019 2044
8,500
1.61%
4.48%
4.58%
Apple Inc. | 2017 Form 10-K | 58
$
Second quarter 2017 debt issuance of $10.0 billion:
2025
Fixed-rate 0.875% notes
Third quarter 2017 euro-denominated debt issuance of €2.5 billion:
2.43%
2,000
2027
Fixed-rate 3.200% notes
2.25%
1,750
2024
1,469
Fixed-rate 2.850% notes
1,000
2022
Fixed-rate 2.300% notes
1.84%
1,000
2020
Fixed-rate 1.800% notes
1.66%
750
2022
2.34%
3.03%
Fixed-rate 1.375% notes
2029
-%
-%
Effective
Interest Rate
2016
| | | |
(Continued)
Amount
(in millions)
Total long-term debt
Less: Current portion of long-term debt
Hedge accounting fair value adjustments
Unamortized premium/(discount) and issuance costs, net
Total term debt
Fixed-rate 3.750% notes
Fixed-rate 2.900% notes
Fixed-rate 2.100% notes
Fixed-rate 1.500% notes
Fourth quarter 2017 debt issuance of $5.0 billion:
Fixed-rate 2.513% notes
Fourth quarter 2017 Canadian dollar-denominated debt issuance of C$2.5
billion:
Fixed-rate 3.000% notes
Third quarter 2017 debt issuance of $1.0 billion:
3.37%
1,469
Floating-rate notes
1.38%
| | | |│││
2020
1.81%
1,000
2022
1.51%
500
2020
1.39%
2019
Effective
Interest Rate
2017
2019
Fixed-rate 4.250% notes
Fixed-rate 3.000% notes
Fixed-rate 2.500% notes
Fixed-rate 1.900% notes
Fixed-rate 1.550% notes
Floating-rate notes
Floating-rate notes
Floating-rate notes
Maturities
(in millions)
Amount
Fixed-rate 3.350% notes
500
500
2020
Floating-rate notes
Third quarter 2017 debt issuance of $7.0 billion:
4.30%
1.59%
1,000
2047
Fixed-rate 4.300% notes
Second quarter 2017 debt issuance of $1.0 billion:
4.26%
1,000
2047
500
2,250
2027
2.11%
1.51%
1,750
2.25%
2024
1.80%
1,500
1,000
2022
13,654 $
4,781 $
Segment operating income
5,518
A reconciliation of the Company's segment operating income to the Consolidated Statements of Operations for 2017, 2016 and 2015 is as follows (in millions):
Research and development expense
Other corporate expenses, net
15,093
5,304 $
$
$
15,199
7,617
7,165 $
8,097
$
15,706
17,733
Total operating income
$
16,928 $
China (1)
2016
Other countries
$
U.S.
Net sales:
The U.S. and China were the only countries that accounted for more than 10% of the Company's net sales in 2017, 2016 and 2015. There was no single
customer that accounted for more than 10% of net sales in 2017, 2016 and 2015. Net sales for 2017, 2016 and 2015 and long-lived assets as of September 30,
2017 and September 24, 2016 were as follows (in millions):
Apple Inc. | 2017 Form 10-K | 67
71,230
$
60,024
61,344 $
$
(4,553)
(4,232)
(4,706)
(8,067)
83,850
74,301 $
(10,045)
(11,581)
77,631 $
$
2015
2017
23,002
2015
$
Rest of Asia Pacific:
Operating income
Net sales
Japan:
Operating income
Net sales
Greater China:
Operating income
Net sales
Europe:
Operating income
Net sales
Americas:
The following table shows information by reportable segment for 2017, 2016 and 2015 (in millions):
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally
based on the location of customers and sales through the Company's retail stores located in those geographic locations. Operating income for each segment
includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Advertising expenses are generally included
in the geographic segment in which the expenditures are incurred. Operating income for each segment excludes other income and expense and certain
expenses managed outside the reportable segments. Costs excluded from segment operating income include various corporate expenses such as R&D,
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 Company manages its business primarily on a geographic basis. The Company's reportable segments consist of the Americas, Europe, Greater China,
Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe includes European countries, as well as India, the Middle East and
Africa. Greater China includes China, Hong Kong and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company's
other reportable segments. Although the reportable segments provide similar hardware and software products and similar services, each one is managed
separately to better align with the location of the Company's customers and distribution partners and the unique market dynamics of each geographic region.
The accounting policies of the various segments are the same as those described in Note 1, "Summary of Significant Accounting Policies."
The Company reports segment information based on the “management" approach. The management approach designates the internal reporting used by
management for making decisions and assessing performance as the source of the Company's reportable segments.
Note 11 - Segment Information and Geographic Data
Total net sales
Net sales
Operating income
2017
2016
17,032
$
58,715
48,492 $
44,764 $
$
16,527
15,348 $
16,514 $
18,835 $
$
49,952 $
$
31,186
93,864
86,613 $
28,172 $
30,684 $
$
96,600 $
$
50,337
Long-lived assets:
229,234
China (1)
Diluted
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
46,852
$
42,358
$
50,557
$
75,872
$
17,813
$
16,106 $
19,921
$
Basic
Earnings per share (1):
Net income
Gross margin
$
2.08
$
1.68
$
2.11
$
2.07
$
30,423
1.67
2.10
Apple Inc. | 2017 Form 10-K | 68
EA EA
$
3.38
$
3.36
2016:
Net sales
$
6769
$
$
The Board of Directors and Shareholders of Apple Inc.
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 30, 2017 and September 24, 2016, and the related
consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended
September 30, 2017. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Apple Inc. at September 30,
2017 and September 24, 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30,
2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Apple Inc.'s internal control over
financial reporting as of September 30, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated November 3, 2017 expressed an unqualified opinion thereon.
San Jose, California
November 3, 2017
/s/ Ernst & Young LLP
Apple Inc. | 2017 Form 10-K | 70
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Apple Inc.
We have audited Apple Inc.'s internal control over financial reporting as of September 30, 2017, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) ("the COSO criteria"). Apple Inc.'s
management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Apple Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2017 consolidated financial
statements of Apple Inc. and our report dated November 3, 2017 expressed an unqualified opinion thereon.
San Jose, California
November 3, 2017
/s/ Ernst & Young LLP
Apple Inc. | 2017 Form 10-K | 71
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Apple Inc. | 2017 Form 10-K | 69
(1) Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share
information may not equal annual basic and diluted earnings per share.
3.28
7,796
$
10,516 $
18,361
$
1.68
$
1.43
$
9,014
1.91
$
1.67
$
1.42
$
1.90
$
EA SA
3.30
$
U.S.
17,891
30,176
2,771
27,010
(1) China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets
related to retail stores and related infrastructure.
Net sales by product for 2017, 2016 and 2015 were as follows (in millions):
iPhone (1)
iPad (1)
Mac (1)
Services (2)
Other Products (1)(3)
Total net sales
2017
2016
2015
$
141,319 $
136,700
$
155,041
19,222
7,875
16,364
2016
33,783 $
Other countries
Total long-lived assets
2017
2016
2015
$
$
84,339 $
44,764
100,131
229,234 $
75,667 $
48,492
20,628
81,732
91,480
215,639 $
93,268
233,715
$
$
2017
20,637 $
10,211
2,935
58,715
11,029 $
23,227
22,831
Third Quarter
Second Quarter
First Quarter
$
52,579
$
45,408 $
52,896
$
78,351
67 69
$
19,931
$
$
10,714 $
8,717
17,488 $
$
20,591 $
Fourth Quarter
Diluted
Basic
Earnings per share (1):
25,471
29,980
24,348
19,909
12,863
11,132
10,067
$
$
25,850
215,639
233,715
(1) Includes deferrals and amortization of related software upgrade rights and non-software services.
(2) Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services. Services net sales in the fourth quarter of 2017 included a
favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.
(3) Includes sales of Apple TV, Apple Watch, Beats products, iPod touch and Apple-branded and third-party accessories.
Note 12 - Selected Quarterly Financial Information (Unaudited)
The following tables show a summary of the Company's quarterly financial information for each of the four quarters of 2017 and 2016 (in millions, except per
share amounts):
2017:
Net sales
Gross margin
Net income
$
54,938 $
10.18*
None.
4.1
114
Officer's Certificate of the Registrant, dated as of February 9, 2017, including forms of global notes 8-K
representing the Floating Rate Notes due 2019, Floating Rate Notes due 2020, Floating Rate
Notes due 2022, 1.550% Notes due 2019, 1.900% Notes due 2020, 2.500% Notes due 2022,
3.000% Notes due 2024, 3.350% Notes due 2027 and 4.250% Notes due 2047.
4.15
8/4/16
4.1
Officer's Certificate of the Registrant, dated as of August 4, 2016, including forms of global notes 8-K
representing the Floating Rate Notes due 2019, 1.100% Notes due 2019, 1.550% Notes due
2021, 2.450% Notes due 2026 and 3.850% Notes due 2046.
4.14
6/22/16
4.1
8-K
Officer's Certificate of the Registrant, dated as of June 22, 2016, including form of global note
representing 4.15% Notes due 2046.
4.13
3/24/16
4.1
8-K
Supplement No. 1 to the Officer's Certificate of the Registrant, dated as of March 24, 2016.
4.12
2/23/16
4.1
9/17/15
4.1
8-K
Officer's Certificate of the Registrant, dated as of September 17, 2015, including forms of global
notes representing the 1.375% Notes due 2024 and 2.000% Notes due 2027.
Officer's Certificate of the Registrant, dated as of February 23, 2016, including forms of global notes 8-K
representing the Floating Rate Notes due 2019, Floating Rate Notes due 2021, 1.300% Notes due
2018, 1.700% Notes due 2019, 2.250% Notes due 2021, 2.850% Notes due 2023, 3.250% Notes
due 2026, 4.500% Notes due 2036 and 4.650% Notes due 2046.
Item 9.
2/9/17
4.16
Officer's Certificate of the Registrant, dated as of March 3, 2017, including form of global note 8-K
representing 4.300% Notes due 2047.
4.1
Employee Stock Purchase Plan, as amended and restated as of March 10, 2015.
10.1*
9/12/17
4.1
Officer's Certificate of the Registrant, dated as of September 12, 2017, including forms of global 8-K
notes representing the 1.500% Notes due 2019, 2.100% Notes due 2022, 2.900% Notes due
2027 and 3.750% Notes due 2047.
4.21
8/18/17
4.1
8-K
Officer's Certificate of the Registrant, dated as of August 18, 2017, including form of global note
representing the 2.513% Notes due 2024.
4.20
6/20/17
4.10
4.1
Officer's Certificate of the Registrant, dated as of June 20, 2017, including form of global note
representing the 3.000% Notes due 2027.
4.19
5/24/17
4.1
8-K
5/11/17
4.1
8-K
Officer's Certificate of the Registrant, dated as of May 11, 2017, including forms of global notes
representing the Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.800% Notes due
2020, 2.300% Notes due 2022, 2.850% Notes due 2024 and 3.200% Notes due 2027.
Officer's Certificate of the Registrant, dated as of May 24, 2017, including forms of global notes
representing the 0.875% Notes due 2025 and 1.375% Notes due 2029.
4.18
4.17
3/3/17
8-K
7/31/15
4.1
8-K
4.1
Officer's Certificate of the Registrant, dated as of May 3, 2013, including forms of global notes 8-K
representing the Floating Rate Notes due 2016, Floating Rate Notes due 2018, 0.45% Notes due
2016, 1.00% Notes due 2018, 2.40% Notes due 2023 and 3.85% Notes due 2043.
Officer's Certificate of the Registrant, dated as of May 6, 2014, including forms of global notes 8-K
representing the Floating Rate Notes due 2017, Floating Rate Notes due 2019, 1.05% Notes due
2017, 2.10% Notes due 2019, 2.85% Notes due 2021, 3.45% Notes due 2024 and 4.45% Notes
due 2044.
4.4
4.3
4/29/13
4.1
S-3
Indenture, dated as of April 29, 2013, between the Registrant and The Bank of New York Mellon
Trust Company, N.A., as Trustee.
4.2
12/30/06
4.1
10-Q
5/3/13
12/15/16
8-K
6/6/14
3.1
8-K
Restated Articles of Incorporation of the Registrant effective as of June 6, 2014.
Amended and Restated Bylaws of the Registrant effective as of December 13, 2016.
Form of Common Stock Certificate of the Registrant.
4.1
3.2
3.1
Period End Date
Exhibit
Form
Exhibit Description
3.2
8-K
4.1
4.5
Officer's Certificate of the Registrant, dated as of July 31, 2015, including forms of global notes
representing the 3.05% Notes due 2029 and 3.60% Notes due 2042.
4.9
Filing Date/
Period End Date
Incorporated by Reference
Exhibit
Form
Exhibit Description
Exhibit
Number
Apple Inc. | 2017 Form 10-K | 74
6/10/15
4.1
Officer's Certificate of the Registrant, dated as of June 10, 2015, including forms of global notes 8-K
representing the 0.350% Notes due 2020.
5/6/14
4.8
4.1
8-K
Officer's Certificate of the Registrant, dated as of May 13, 2015, including forms of global notes
representing the Floating Rate Notes due 2017, Floating Rate Notes due 2020, 0.900% Notes due
2017, 2.000% Notes due 2020, 2.700% Notes due 2022, 3.200% Notes due 2025, and 4.375%
Notes due 2045.
4.7
2/9/15
4.1
8-K
Officer's Certificate of the Registrant, dated as of February 9, 2015, including forms of global notes
representing the Floating Rate Notes due 2020, 1.55% Notes due 2020, 2.15% Notes due 2022,
2.50% Notes due 2025 and 3.45% Notes due 2045.
4.6
11/10/14
4.1
Officer's Certificate of the Registrant, dated as of November 10, 2014, including forms of global 8-K
notes representing the 1.000% Notes due 2022 and 1.625% Notes due 2026.
5/13/15
Filing Date/
10.1
10.2*
**
10.21*,
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of
September 26, 2017.
**
10.20*,
9/24/16
10.19
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of October 10-K
14. 2016.
10.19*
9/24/16
10.18
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of 10-K
October 14, 2016.
3/26/16
10.17
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of October 5, 10-Q
2015.
10.17*
3/26/16
10.16
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of 10-Q
October 5, 2015.
10.16*
12/27/14
12/26/15
10.15
10-Q
Form of Restricted Stock Unit Award Agreement under the 1997 Director Stock Plan as of
November 17, 2015.
10.15*
12.1**
21.1**
23.1**
24.1**
Apple Inc. | 2017 Form 10-K | 76
Form 10-K Summary
Item 16.
None.
(1) Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The
Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
Furnished herewith.
Indicates management contract or compensatory plan or arrangement.
Filed herewith.
XBRL Taxonomy Extension Presentation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
**
101.DEF**
101.LAB**
101.PRE**
XBRL Taxonomy Extension Calculation Linkbase Document.
101.CAL**
10.14
XBRL Taxonomy Extension Schema Document.
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
XBRL Instance Document.
101.INS**
32.1***
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
31.2**
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.
31.1**
Power of Attorney (included on the Signatures page of this Annual Report on Form 10-K).
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Subsidiaries of the Registrant.
Computation of Ratio of Earnings to Fixed Charges.
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of
September 26, 2017.
101.SCH**
10-Q
9/27/14
10.13
10.8*,
6/30/12
10.8
Summary Description of Amendment, effective as of May 24, 2012, to certain Restricted Stock Unit 10-Q
Award Agreements outstanding as of April 5, 2012.
10.7*
3/31/12
10.8
10-Q
Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of
April 6, 2012.
10.6*
3/1/10
12/25/10
10.10
2014 Employee Stock Plan, as amended and restated as of October 1, 2017.
Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of 10-Q
November 16, 2010.
10.1
8-K
2003 Employee Stock Plan, as amended through February 25, 2010.
10.4*
12/28/13
10.3
10-Q
1997 Director Stock Plan, as amended through August 23, 2012.
10.3*
6/27/09
10.2
Form of Indemnification Agreement between the Registrant and each director and executive officer 10-Q
of the Registrant.
10.5*
3/13/15
10.9*
10.2
Form of Amendment, effective as of August 26, 2014, to Restricted Stock Unit Award Agreements 10-K
and Performance Award Agreements outstanding as of August 26, 2014.
Offer Letter, dated August 1, 2013, from the Registrant to Angela Ahrendts.
10.14*
10.13*
9/27/14
10.12
10-K
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 26,
2014.
10.12*
Period End Date
Exhibit
Form
Exhibit Description
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan as of February 8-K
28, 2014.
Number
Incorporated by Reference
Exhibit
Apple Inc. | 2017 Form 10-K | 75
9/27/14
10.11
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of 10-K
August 26, 2014.
10.11*
3/5/14
10.3
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of February 8-K
28, 2014.
10.10*
3/5/14
Filing Date/
Exhibit
Number
4.11
43
The information required by this Item is set forth under the headings "Other Information-Security Ownership of Certain Beneficial Owners and Management"
and "Other Information-Equity Compensation Plan Information" in the Company's 2018 Proxy Statement to be filed with the SEC within 120 days after
September 30, 2017 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is set forth under the subheadings "Board Committees", "Review, Approval, or Ratification of Transactions with Related
Persons" and "Transactions with Related Persons" under the heading "Corporate Governance" in the Company's 2018 Proxy Statement to be filed with the SEC
within 120 days after September 30, 2017 and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services
The information required by this Item is set forth under the subheadings "Fees Paid to Auditors" and "Policy on Audit Committee Pre-Approval of Audit and Non-
Audit Services Performed by the Independent Registered Public Accounting Firm" under the proposal “Ratification of Appointment of Independent Registered
Public Accounting Firm" in the Company's 2018 Proxy Statement to be filed with the SEC within 120 days after September 30, 2017 and is incorporated herein
by reference.
Apple Inc. | 2017 Form 10-K | 73
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1) All financial statements
Index to Consolidated Financial Statements
Consolidated Statements of Operations for the years ended September 30, 2017, September 24, 2016 and September 26, 2015
Consolidated Statements of Comprehensive Income for the years ended September 30, 2017, September 24, 2016 and September 26, 2015
Consolidated Balance Sheets as of September 30, 2017 and September 24, 2016
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2017, September 24, 2016 and September 26, 2015
Consolidated Statements of Cash Flows for the years ended September 30, 2017, September 24, 2016 and September 26, 2015
Notes to Consolidated Financial Statements
Selected Quarterly Financial Information (Unaudited)
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm
(2) Financial Statement Schedules
Page
39
40
41
42
44
68
70
(3) Exhibits required by Item 601 of Regulation S-K (1)
Incorporated by Reference
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12.
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.
Executive Compensation
The information required by this Item is set forth under the heading "Executive Compensation," under the subheadings “Board Oversight of Risk Management"
and "Compensation Committee Interlocks and Insider Participation" under the heading "Corporate Governance" and under the subheadings "Compensation of
Directors" and "Director Compensation- 2017" under the heading "Directors” in the Company's 2018 Proxy Statement to be filed with the SEC within 120 days
after September 30, 2017 and is incorporated herein by reference.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company's management, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act
were effective as of September 30, 2017 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and
(ii) accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Inherent Limitations Over Internal Controls
The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles ("GAAP”). The Company's internal
control over financial reporting includes those policies and procedures that:
(i)
(ii)
(iii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's
assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
GAAP, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's
management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets
that could have a material effect on the financial statements.
Item 9A.
Management's Annual Report on Internal Control Over Financial Reporting
The Company has a code of ethics, “Business Conduct: The way we do business worldwide," that applies to all employees, including the Company's principal
executive officer, principal financial officer, and principal accounting officer, as well as to the members of the Board of Directors of the Company. The code is
available at investor.apple.com/corporate-governance.cfm. The Company intends to disclose any changes in, or waivers from, this code by posting such
information on the same website or by filing a Form 8-K, in each case to the extent such disclosure is required by rules of the SEC or Nasdaq.
Item 11.
The information required by this Item is set forth under the headings "Corporate Governance," "Directors,” “Executive Officers" and "Other Information-Security
Ownership of Certain Beneficial Owners and Management" in the Company's 2018 Proxy Statement to be filed with the SEC within 120 days after
September 30, 2017 in connection with the solicitation of proxies for the Company's 2018 annual meeting of shareholders and is incorporated herein by
reference.
Directors, Executive Officers and Corporate Governance
Management, including the Company's Chief Executive Officer and Chief Financial Officer, does not expect that the Company's internal controls will prevent or
detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide
absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future
periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PART III
Item 10.
Not applicable.
Item 9B. Other Information
There were no changes in the Company's internal control over financial reporting during the fourth quarter of 2017, which were identified in connection with
management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the
criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework). Based on the Company's assessment, management has concluded that its internal control over financial reporting was effective as of
September 30, 2017 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance
with GAAP. The Company's independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company's internal control
over financial reporting, which appears in Part II, Item 8 of this Form 10-K.
Apple Inc. | 2017 Form 10-K | 72
(jj) "SAR Agreement” means the agreement described in Section 7 evidencing a Stock Appreciation Right.
(ii) "Restricted Stock Unit Agreement” means the agreement described in Section 9 evidencing a Restricted Stock Unit Award.
"Restricted Stock Unit" means a bookkeeping entry representing the equivalent of one Share awarded under the Plan and represents an
unfunded and unsecured obligation of the Company.
(hh)
(dd) "Performance Goals" means one or more objective measurable performance goals established by the Committee with respect to a
Performance Period based upon one or more of the following criteria: (i) operating income; (ii) earnings before interest, taxes, depreciation and
amortization; (iii) earnings; (iv) cash flow; (v) market share; (vi) sales or revenue; (vii) expenses; (viii) cost of goods sold; (ix) profit/loss or profit
margin; (x) working capital; (xi) return on equity or assets; (xii) earnings per share; (xiii) total shareholder return; (xiv) price/earnings ratio; (xv) debt
or debt-to-equity; (xvi) accounts receivable; (xvii) writeoffs; (xviii) cash; (xix) assets; (xx) liquidity; (xxi) operations; (xxii) intellectual property (e.g.,
patents); (xxiii) product
(ff) "Plan" means this Apple Inc. 2014 Employee Stock Plan, as it may be amended from time to time.
"Performance Period” means any period not exceeding 120 months as determined by the Committee, in its sole discretion. The Committee
may establish different Performance Periods for different Participants, and the Committee may establish concurrent or overlapping Performance
Periods.
(ee)
development; (xxiv) manufacturing, production or inventory; (xxv) mergers and acquisitions or divestitures; and/or (xxvi) stock price. Any criteria
used may be measured, as applicable, (a) in absolute terms, (b) in relative terms (including but not limited to, the passage of time and/or against
other companies or financial metrics), (c) on a per share and/or share per capita basis, (d) against the performance of the Company as a whole or
against particular entities, segments, operating units or products of the Company and/or (e) on a pre-tax or after tax basis. Awards granted to
persons who are not Covered Employees may take into account any other factors deemed appropriate by the Committee.
"Participant” means an Employee or Consultant who has been selected by the Committee to receive an Award under the Plan or any
individual, estate or other entity that holds an Award.
(gg) "Re-Price" or "Re-Pricing" means any of the following actions taken by the Committee: (1) lowering or reducing the Exercise Price of an
outstanding Option and/or outstanding SAR, (2) cancelling, exchanging or surrendering any outstanding Option and/or outstanding SAR in exchange
for cash or another award for the purpose of repricing the award; (3) cancelling, exchanging or surrendering any outstanding Option and/or
outstanding SAR in exchange for an Option or SAR with an Exercise Price that is less than the Exercise Price of the original award; and (4) any
other action that is treated as a repricing under U.S. generally accepted accounting principles; provided that, in each case, a Re-Pricing (or Re-
Price, as the case may be) shall not include (y) any action taken with shareholder approval, and (z) any adjustment of an Option or SAR pursuant to
Section 11.
(kk) "SEC" means the U.S. Securities and Exchange Commission.
(rr) "Stock Option Agreement” means the agreement described in Section 6 evidencing an Option.
(nn) "Share" means one share of Common Stock.
(oo) “Stock Appreciation Right" or "SAR” means a stock appreciation right awarded under the Plan.
(pp) "Stock Grant" means Shares awarded under the Plan pursuant to Section 8.
(qq) "Stock Grant Agreement" means the agreement described in Section 8 evidencing a Stock Grant.
4
(ss) "Subsidiary" means any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly
or indirectly by the Company. An entity that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a
Subsidiary commencing as of such date.
(tt) "10-Percent Stockholder" means an individual who owns more than 10% of the total combined voting power of all classes of outstanding stock
of the Company or of its parent corporation or subsidiary corporation (as defined in Code Sections 424(e) and (f)). In determining stock ownership,
the attribution rules of Code Section 424(d) shall be applied.
(uu) "Termination of Service” means (i) in the case of an Employee, a cessation of the provision of employment-related services by the Employee
for the Company and its Subsidiaries for any reason, including but not by way of limitation, a termination by resignation, discharge, death, disability,
or retirement, but excluding any such termination where there is a simultaneous reemployment by the Company or a Subsidiary and excluding any
bona fide and Company (or Subsidiary) approved leave of absence; and (ii) in the case of a Consultant, a cessation of the service relationship (as
determined by the Committee in its sole discretion) between the Consultant and the Company and its Subsidiaries for any reason, including but not
by way of limitation, a termination by resignation, discharge, death or disability, but excluding any such termination where there is a simultaneous re-
engagement of the Consultant by the Company or a Subsidiary. For purposes of the Plan and any Award, if an entity ceases to be a Subsidiary of
the Company, a Termination of Service shall be deemed to have occurred with respect to each Employee and Consultant in respect of such
Subsidiary who does not continue as an Employee or Consultant in respect of the Company or another Subsidiary that continues as such after
giving effect to the transaction or other event giving rise to the change in status unless the Subsidiary that is sold, spun-off or otherwise divested (or
its successor or a direct or indirect parent of such Subsidiary or successor) assumes the Employee's or Consultant's Award(s) in connection with
such transaction. Notwithstanding the foregoing provisions of this definition, with respect to any Award that constitutes a “nonqualified deferred
compensation plan" within the meaning of Code Section 409A as to which a Termination of Service is or could be an event entitling the Award holder
to the delivery of Shares or other payment, a Participant shall not be considered to have experienced a “Termination of Service" unless the
Participant has experienced a “separation from service" within the meaning of Code Section 409A (a "Separation from Service").
SECTION 3. ADMINISTRATION.
(a) Committee Composition. The Board or a Committee appointed by the Board shall administer the Plan. The Committee shall generally have
membership composition which enables (i) Awards to Section 16 Persons to qualify as exempt from liability under Section 16(b) of the Exchange Act
and (ii) Awards to Covered Employees to qualify as performance-based compensation as provided under Code Section 162(m). However, the Board
may also appoint one or more separate Committees, each composed of two or more directors of the Company who need not qualify under
Rule 16b-3 or Code Section 162(m), that may administer the Plan with respect to Participants who are not Section 16 Persons or Covered
Employees, respectively, may grant Awards under the Plan to such Participants and may determine all terms of such Awards. Members of any such
Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may
also at any time terminate the functions of any Committee and reassume all powers and authority previously delegated to the Committee.
(cc)
The Board and any Committee appointed to administer the Plan is referred to herein as the "Committee."
(II) "Section 16 Persons" means those officers, directors or other persons who are subject to Section 16 of the Exchange Act.
(mm) "Securities Act" means the U.S. Securities Act of 1933, as amended.
(bb) "Parent" means any corporation or other entity that beneficially owns directly or indirectly a majority of the Company's outstanding voting
stock or voting power. An entity that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing
as of such date.
(p) "Employee" means any individual who provides services as an employee of the Company, a Parent or a Subsidiary (including any Director that
is also an Employee).
(z) "Nonstatutory Stock Option" or "NSO” means a stock option that is not an ISO.
5
(e) "Board" means the Board of Directors of the Company, as constituted from time to time.
(f) "Cash Bonus Award” means an Award granted pursuant to Section 10(b) of the Plan.
(g) "Cashless Exercise” means, to the extent that a Stock Option Agreement so provides and as permitted by Applicable Laws, one or both of (i) a
program approved by the Committee in which payment of the aggregate Exercise Price and/or satisfaction of any applicable tax withholding
obligations may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell
Shares subject to an Option and to deliver all or part of the sale proceeds to the Company, or (ii) allowing an Option to be exercised by the
Participant irrevocably instructing the Company to withhold a number of Shares subject to the Option having a Fair Market Value on the date of
exercise equal to the sum of (x) the product of (A) the Exercise Price multiplied by (B) the number of Shares in respect of which the Option shall
have been exercised, plus (y) any applicable tax withholding obligations.
(h) "Code" means the U.S. Internal Revenue Code of 1986, as amended, and the regulations and interpretations promulgated thereunder.
(i) “Committee” has the meaning given to such term in Section 3.
(j) "Common Stock" means the Company's common stock.
(k) "Company" means Apple Inc., a California corporation.
(I)
"Consultant" means an individual who provides bona fide services to the Company, a Parent or a Subsidiary, other than as an Employee or
Director.
(m)
"Covered Employee" means each Participant who the Committee determines is, or may be at the time the Company otherwise could deduct
for Federal income tax purposes amounts in respect of an Award, subject to the limitations of Code Section 162(m).
(n) "Director" means a member of the Board.
(o) "Disability” means that the Participant is classified as disabled under the long-term disability policy of the Company or, if no such policy applies,
the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which
can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months; provided,
however, that with respect to an Option intended to qualify as an ISO, "Disability” shall mean a "permanent and total disability” within the meaning of
Code Section 22(e)(3).
(q) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(r) “Exercise Price" means, in the case of an Option, the amount for which a Share may be purchased upon exercise of such Option, as specified
in the applicable Stock Option Agreement. “Exercise Price," in the case of a SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value at the time such SAR is exercised in determining the amount payable upon exercise of such SAR.
2
(s) "Fair Market Value" means, unless otherwise determined or provided by the Committee in the circumstances, the closing price (in regular
trading) for a Share on the Nasdaq Stock Market (the "Market”) for the date in question or, if no sales of Common Stock were reported on the Market
on that date, the last price (in regular trading) for a Share on the Market for the next preceding day on which sales of Common Stock were reported
on the Market. The Committee may, however, provide with respect to one or more Awards that the Fair Market Value shall equal the last price for a
Share on the Market on the last trading day preceding the date in question or the average of the high and low trading prices of a Share on the
Market for the date in question or the most recent trading day. If the Common Stock is no longer listed or is no longer actively traded on the Market
as of the applicable date, the Fair Market Value of the Common Stock shall be the value as reasonably determined by the Committee for purposes
of the Award in the circumstances. The Committee also may adopt a different methodology for determining Fair Market Value with respect to one or
more Awards if a different methodology is necessary or advisable to secure any intended favorable tax, legal or other treatment for the particular
Award(s) (for example, and without limitation, the Committee may provide that Fair Market Value for purposes of one or more Awards will be based
on an average of closing prices (or the average of high and low daily trading prices) for a specified period preceding the relevant date).
(t) "Fiscal Year" means the Company's fiscal year.
(u) "Full-Value Awards" means Awards granted under the Plan other than Options and SARS.
(v) "Full-Value Award Ratio" means the share-counting ratio applicable to Full-Value Awards as specified in Section 5(b) of the Plan.
(w)
"Grant Date" means the date on which the Committee makes the determination to grant an Award or such later date as the Committee may
specify in making such determination.
(x) "Incentive Stock Option” or “ISO" means an incentive stock option described in Code Section 422.
(y) “Non-Employee Director” means a member of the Board who is not an Employee.
(aa) "Option" means an ISO or NSO granted under the Plan entitling the Participant to purchase Shares upon satisfaction of the conditions
contained in the Plan and the applicable Award Agreement.
(b) Authority of the Committee. Subject to the provisions of the Plan, the Committee shall have the full authority, in its sole discretion, to take any
actions it deems necessary or advisable for the administration of the Plan. Such actions shall include:
(i) Unless otherwise expressly provided in (or pursuant to) this Section 4(c) or required by Applicable Law: (A) all Awards are non-
transferable and shall not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge;
(B) Awards that are Options or Stock Appreciation Rights shall be exercised only by the Participant; and (C) amounts payable or Shares
issuable pursuant to any Award shall be delivered only to (or for the account of) the Participant.
(ii) determining the Fair Market Value for purposes of any Award;
(ii) The Committee may permit Awards to be exercised by and paid to, or otherwise transferred to, other persons or entities pursuant to
such conditions and procedures, including limitations on subsequent transfers, as the Committee may, in its sole discretion, establish in
writing. Any permitted transfer shall be subject to compliance with Applicable Laws and shall not be for value (other than nominal
consideration, settlement of marital property rights, or for interests in an entity in which more than 50% of the voting interests are held by the
Participant or by the Participant's family members).
(iii) The exercise and transfer restrictions in Section 4(c) shall not apply to:
(A) transfers to the Company (for example, in connection with the expiration or termination of the Award),
(B)
the designation of a beneficiary to receive benefits in the event of the Participant's death or, if the Participant has died,
transfers to or exercise by the Participant's beneficiary, or, in the absence of a validly designated beneficiary, transfers by will or the
laws of descent and distribution,
(C) subject to any applicable limitations on ISOs, transfers to a family member (or former family member) pursuant to a domestic
relations order if approved or ratified by the Company,
(D) if the Participant has suffered a Disability, permitted transfers or exercises on behalf of the participant by his or her legal
representative, or
(E) the authorization by the Committee of Cashless Exercise procedures with third parties who provide financing for the purpose
of (or who otherwise facilitate) the exercise of Awards consistent with Applicable Laws and the express authorization of the
Committee.
Beneficiaries. If permitted by the Committee in the Award Agreement, a Participant under the Plan may name a beneficiary or beneficiaries to
whom any vested but unpaid Award shall be paid in the event of the Participant's death. Each such designation shall revoke all prior beneficiary
designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such
designation, any vested benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate and, subject to the terms of the
Plan and of the applicable Award Agreement, any unexercised vested Award may be exercised by the administrator or executor of the Participant's
estate.
(e) No Rights as a Shareholder. A Participant, or a transferee of a Participant, shall have no rights as a shareholder with respect to any Common
Stock covered by an Award until such person has satisfied all of the terms and conditions to receive such Common Stock, has satisfied any
applicable withholding or tax obligations relating to the Award and the Shares have been issued (as evidenced by an appropriate entry on the books
of the Company or a duly authorized transfer agent of the Company).
(f)
Termination of Service. The Committee shall establish the effect of a Termination of Service on the rights and benefits under each Award under
the Plan and in so doing may make distinctions based upon, inter alia, the cause of termination and type of Award.
(g) Consideration. The purchase price for any Award granted under the Plan or the Common Stock to be delivered pursuant to an award, as
applicable, may be paid by means of any lawful consideration as determined by the Committee.
8
SECTION 5. SHARES SUBJECT TO PLAN AND SHARE LIMITS.
(a)
Basic Limitation. The stock issuable under the Plan shall be authorized but unissued Shares. The aggregate number of Shares that may be
issued pursuant to Awards under the Plan, subject to adjustment pursuant to Section 11, is equal to:
(i) 385,000,000 Shares, plus
(ii)
the number of any Shares that remained available under the 2003 Plan for new award grants on the Approval Date, and
determined immediately before giving effect to the termination of the authority to grant new awards under the 2003 Plan in
connection with such approval, plus
(iii) the number of any Shares subject to stock options granted under the 2003 Plan and outstanding as of the Approval Date
which expire, or for any reason are cancelled or terminated, after the Approval Date without being exercised, plus
(iv) the number of any Shares subject to restricted stock and restricted stock unit awards granted under the 2003 Plan that were
outstanding and unvested on the Approval Date that are forfeited, terminated, cancelled or otherwise reacquired by the Company
after the Approval Date without having become vested or that are exchanged by a Participant or withheld by the Company or one of
its Subsidiaries after the Approval Date to satisfy the tax withholding obligations related to the award (in each case, with any such
Shares increasing the Shares available for issuance under the Plan based on the Full-Value Award Ratio).
provided that in no event shall the Shares available for issuance under the Plan exceed 766,339,189 Shares (which is the sum of (1) the
385,000,000 Shares set forth above, plus (2) the number of Shares available for new award grants under the 2003 Plan on November 11,
2013, plus (3) the aggregate number of Shares subject to stock options previously granted and outstanding under the 2003 Plan as of
November 11, 2013, plus (4) two (2) (the Full-Value Award Ratio) times the aggregate number of Shares subject to restricted stock and
restricted stock units previously granted and outstanding under the 2003 Plan as of November 11, 2013).
(b) Share Count. Shares issued pursuant to Awards under the Plan other than Options or SARS will count against the Shares available for
issuance under the Plan as two (2) Shares for every one (1) Share issued in connection with the Award. Shares issued pursuant to the exercise of
Options or SARs under the Plan will count against the Shares available for issuance under the Plan as one (1) Share for every one Share to which
such exercise relates. For purposes of clarity, the total number of Shares subject to SARs that are exercised and settled in Shares, and the total
number of Shares subject to Options that are exercised, shall be counted in full on a one-for-one basis against the number of Shares available for
issuance under the Plan, regardless of the number of Shares actually issued upon settlement of the SARS or Options. If Awards are settled in cash,
the Shares that would have been delivered had there been no cash settlement shall not be counted against the Shares available for issuance under
the Plan. Except as provided in the next sentence, Shares that are subject to Awards that are forfeited, are terminated, fail to vest or for any other
reason are not paid or delivered, shall again become available for Awards under the Plan; provided that any one (1) Share issued pursuant to a
Stock Grant or subject to a Restricted Stock Unit Award (including Shares subject to stock-settled dividend equivalent rights) that is forfeited or
terminated shall be credited as two (2) Shares when determining the number of Shares that shall again become available for Awards under the Plan
if upon
9
(d)
7
1
(c) Restrictions on Transfer.
(iii)
determining the type of and number of securities to be subject to each Award, and the Grant Date, vesting requirements and other
features and conditions of such Awards;
(iv) approving the forms of Award Agreements to be used under the Plan;
(v) amending any outstanding Awards;
(vi) accelerating the vesting or extending the post-termination exercise term of Awards at any time and under such terms and conditions
as it deems appropriate (including, without limitation, in connection with a termination of employment or services due to the Participant's
Death, Disability, or retirement), or tolling the vesting of Awards at any time and under such terms and conditions as it deems appropriate
(including, without limitation, in connection with a Participant's leave of absence), subject, in each case, to any required consent under
Section 15;
(vii)
construing and interpreting the Plan and any agreements defining the rights and obligations of the Company, its Subsidiaries, and
Participants under the Plan;
(viii) correcting any defect, supplying any omission or reconciling any inconsistency in the Plan or any Award Agreement;
(ix) adopting such rules or guidelines as it deems appropriate to implement the Plan;
(x)
authorizing any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously
authorized by the Committee;
(xi) adjusting the number of Shares subject to any Award, adjusting the price of any or all outstanding Awards or otherwise changing
previously imposed terms and conditions, in such circumstances as the Committee may deem appropriate, in each case subject to
Sections 5 and 15, and subject to the no Re-Pricing provision below;
(i) selecting Participants who are to receive Awards under the Plan;
(xii) determining whether, and the extent to which, adjustments are required pursuant to Section 13 hereof and authorizing the termination,
conversion, substitution or succession of Awards upon the occurrence of an event of the type described in Section 13;
(xiv) making all other decisions relating to the operation of the Plan; and
6
(XV) adopting such plans or subplans as may be deemed necessary or appropriate to comply with the laws of other countries, allow for
tax-preferred treatment of Awards or otherwise provide for the participation by Participants who reside outside of the U.S.
In no event shall the Committee Re-Price any Option or SAR.
The Committee's determinations under the Plan shall be final and binding on all persons. The Committee's determinations under the Plan need not
be the same for all persons.
(c)
Indemnification. To the maximum extent permitted by applicable laws, each member of the Committee shall be indemnified and held harmless
by the Company against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in
connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by
reason of any action taken or failure to act under the Plan or any Award Agreement, and (ii) from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding
against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she
undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, by contract, as a matter of law, or
otherwise, or under any power that the Company may have to indemnify them or hold them harmless.
(d) Reliance on Experts. In making any determination or in taking or not taking any action under the Plan, the Committee may obtain and may rely
upon the advice of experts, including employees and professional advisors to the Company. No director, officer or agent of the Company or any of
its Subsidiaries shall be liable for any such action or determination taken or made or omitted in good faith.
SECTION 4. GENERAL.
(a)
General Eligibility. Only Employees and Consultants shall be eligible to participate in the Plan. Non-Employee Directors are not eligible for
Award grants under the Plan.
(b) Incentive Stock Options. Only Participants who are Employees of the Company, a "parent corporation" of the Company (within the meaning of
Code Section 424(e)) or a “subsidiary corporation" of the Company (within the meaning of Code Section 424(f)) shall be eligible for the grant of
ISOs. In addition, a 10-Percent Stockholder shall not be eligible for the grant of an ISO unless the requirements set forth in Code Section 422(c)(5)
are satisfied.
(xiii) acquiring or settling (subject to Sections 13 and 15) rights under Awards in cash, stock of equivalent value, or other consideration,
subject to the no Re-Pricing provision below;
(d) "Award Agreement” means any Stock Option Agreement, SAR Agreement, Stock Grant Agreement, Restricted Stock Unit Agreement or any
written document that evidences a Cash Bonus Award granted under the Plan. Award Agreements shall consist of either (1) a written award
agreement in a form approved by the Committee and executed by the Company by an officer duly authorized to act on its behalf, or (2) an electronic
notice of award grant in a form approved by the Committee and recorded by the Company (or its designee) in an electronic recordkeeping system
used for the purpose of tracking award grants under the Plan generally, as the Committee may provide and, in each case and if required by the
Committee, executed or otherwise electronically accepted by the recipient of the Award in such form and manner as the Committee may require.
The Committee may authorize any officer of the Company (other than the particular Award recipient) to execute any or all Award Agreements on
behalf of the Company.
3
"Applicable Laws" means all applicable securities, tax and exchange control laws, rules, regulations and requirements relating to the
administration of stock plans, including, but not limited to, all applicable U.S. federal and state laws, the rules and regulations of any stock exchange
or quotation system on which the Common Stock is listed or quoted, and the applicable securities, tax and exchange control laws, rules, regulations
or requirements of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan or where Participants reside or provide
services, as such laws, rules, regulations and requirements shall be in place from time to time.
/s/ Robert A. Iger
Director
AL GORE
/s/ Al Gore
Director
JAMES A. BELL
/s/ James A. Bell
Senior Director of Corporate Accounting
(Principal Accounting Officer)
CHRIS KONDO
/s/ Chris Kondo
November 3, 2017
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: November 3, 2017
Apple Inc.
By:
(c) "Award" means an Option, SAR, Stock Grant, Restricted Stock Unit or Cash Bonus Award.
November 3, 2017
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Luca Maestri
TIMOTHY D. COOK
/s/ Timothy D. Cook
Director
Date
Name
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Timothy D. Cook and Luca Maestri,
jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Power of Attorney
Senior Vice President,
Chief Financial Officer
Luca Maestri
/s/ Luca Maestri
Title
ROBERT A. IGER
LUCA MAESTRI
ANDREA JUNG
November 3, 2017
November 3, 2017
November 3, 2017
November 3, 2017
November 3, 2017
APPLE INC.
2014 EMPLOYEE STOCK PLAN
(AS AMENDED AND RESTATED AS OF OCTOBER 1, 2017)
Exhibit 10.8
This 2014 Employee Stock Plan was approved by the Company's shareholders on February 28, 2014 (the "Approval Date”). The Plan was
subsequently amended and restated by the Board on November 17, 2015 and approved by the Company's shareholders at the Annual Meeting on
February 26, 2016. The Plan was further amended and restated by the Board as set forth herein effective October 1, 2017.
The purpose of the Plan is to promote the long-term success of the Company and the creation of shareholder value by offering Participants the
opportunity to share in such long-term success by acquiring a proprietary interest in the Company.
The Plan seeks to achieve this purpose by providing for discretionary long-term incentive Awards in the form of Options (which may be Incentive
Stock Options or Nonstatutory Stock Options), Stock Appreciation Rights, Stock Grants, Restricted Stock Units and Cash Bonus Awards.
Capitalized terms shall have the meaning provided in Section 2 unless otherwise provided in this Plan or any related Award Agreement.
SECTION 2. DEFINITIONS.
(a) "2003 Plan" means the Apple Inc. 2003 Employee Stock Plan as amended from time to time.
/s/ Andrea Jung
(b)
November 3, 2017
November 3, 2017
SECTION 1. INTRODUCTION.
/s/ Ronald D. Sugar
RONALD D. SUGAR
ARTHUR D. LEVINSON
/s/ Susan L. Wagner
Director
SUSAN L. WAGNER
Director
/s/ Arthur D. Levinson
Director
Director
November 3, 2017
Apple Inc. | 2017 Form 10-K | 77
(Exact name of Registrant as specified in its charter)
Item 9C.
53
Other Information
Item 9B.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
53
(Registrant's telephone number, including area code)
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
53
Item 11.
Executive Compensation
53
Item 12.
Item 13.
52
52
FORM 10-K
Item 9A.
Apple Inc.
Commission File Number: 001-36743
to
(State or other jurisdiction
of incorporation or organization)
One Apple Park Way
Cupertino, California
(Address of principal executive offices)
(408) 996-1010
94-2404110
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
(I.R.S. Employer Identification No.)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
or
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2023
(Mark One)
California
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Item 9.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
53
Company Background
Item 14.
Wearables includes smartwatches and wireless headphones. The Company's line of smartwatches, based on its watchOSⓇ
operating system, includes Apple Watch Ultra™ 2, Apple WatchⓇ Series 9 and Apple Watch SE®. The Company's line of
wireless headphones includes AirPodsⓇ, AirPods ProⓇ, AirPods Max™ and BeatsⓇ products.
Home includes Apple TVⓇ, the Company's media streaming and gaming device based on its tvOSⓇ operating system, and
HomePodⓇ and HomePod miniⓇ, high-fidelity wireless smart speakers.
Accessories includes Apple-branded and third-party accessories.
Apple Inc. | 2023 Form 10-K |1
Services
Securities registered pursuant to Section 12(b) of the Act:
Advertising
The Company's advertising services include third-party licensing arrangements and the Company's own advertising platforms.
Wearables, Home and Accessories
AppleCare
Cloud Services
The Company's cloud services store and keep customers' content up-to-date and available across multiple Apple devices and
Windows personal computers.
Digital Content
The Company operates various platforms, including the App StoreⓇ, that allow customers to discover and download applications
and digital content, such as books, music, video, games and podcasts.
The Company also offers digital content through subscription-based services, including Apple ArcadeⓇ, a game subscription
service; Apple Fitness+ SM, a personalized fitness service; Apple MusicⓇ, which offers users a curated listening experience with
on-demand radio stations; Apple News+Ⓡ, a subscription news and magazine service; and Apple TV+Ⓡ, which offers exclusive
original content and live sports.
Payment Services
The Company offers payment services, including Apple Card®, a co-branded credit card, and Apple PayⓇ, a cashless payment
service.
The Company offers a portfolio of fee-based service and support products under the AppleCare® brand. The offerings provide
priority access to Apple technical support, access to the global Apple authorized service network for repair and replacement
services, and in many cases additional coverage for instances of accidental damage or theft and loss, depending on the country
and type of product.
53
iPad® is the Company's line of multipurpose tablets based on its iPadOSⓇ operating system. The iPad line includes iPad ProⓇ,
iPad Air, iPad and iPad miniⓇ.
Mac® is the Company's line of personal computers based on its macOSⓇ operating system. The Mac line includes laptops
MacBook AirⓇ and MacBook ProⓇ, as well as desktops iMacⓇ, Mac miniⓇ, Mac StudioⓇ and Mac Pro®.
Principal Accountant Fees and Services
53
Part IV
Item 15.
Exhibit and Financial Statement Schedules
Item 16.
Form 10-K Summary
54
iPad
57
Unless otherwise stated, all information presented herein is based on the Company's fiscal calendar, and 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.
PARTI
Item 1. Business
The Company designs, manufactures and markets smartphones, personal computers, tablets, wearables and accessories, and
sells a variety of related services. The Company's fiscal year is the 52- or 53-week period that ends on the last Saturday of
September.
Products
iPhone
iPhone is the Company's line of smartphones based on its iOS operating system. The iPhone line includes iPhone 15 Pro,
iPhone 15, iPhone 14, iPhone 13 and iPhone SEⓇ.
Mac
This Annual Report on Form 10-K ("Form 10-K") contains forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are
located in Part I, Item 1 of this Form 10-K under the heading "Business" and Part II, Item 7 of this Form 10-K under the heading
"Management's Discussion and Analysis of Financial Condition and Results of Operations." 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. For example, statements in this Form 10-K regarding the potential future impact of
macroeconomic conditions on the Company's business and results of operations are forward-looking statements. Forward-
looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects,"
"intends," "plans,” “predicts," "will," "would," "could," "can,” “may,” and similar terms. Forward-looking statements are not
guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I,
Item 1A of this Form 10-K under the heading "Risk Factors." The Company assumes no obligation to revise or update any
forward-looking statements for any reason, except as required by law.
Trading
symbol(s)
AAPL
27
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Item 3.
Properties
Item 2.
Cybersecurity
Unresolved Staff Comments
Item 1C.
Item 1B.
5
Legal Proceedings
LO
Item 1A.
1
Business
Item 1.
Page
Part I
TABLE OF CONTENTS
For the Fiscal Year Ended September 30, 2023
Risk Factors
Form 10-K
Item 4.
16
Segments
Financial Statements and Supplementary Data
Item 8.
26
20
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Item 7.
Item 7A.
19
Mine Safety Disclosures
[Reserved]
18
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 5.
Part II
17
17
17
16
Item 6.
95014
(Zip Code)
Apple Inc.
DOCUMENTS INCORPORATED BY REFERENCE
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
3.600% Notes due 2042
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
0.500% Notes due 2031
1.375% Notes due 2029
2.000% Notes due 2027
1.625% Notes due 2026
0.875% Notes due 2025
0.000% Notes due 2025
1.375% Notes due 2024
Common Stock, $0.00001 par value per share
Title of each class
3.050% Notes due 2029
Portions of the Registrant's definitive proxy statement relating to its 2024 annual meeting of shareholders are incorporated by reference into Part
Ill of this Annual Report on Form 10-K where indicated. The Registrant's definitive proxy statement will be filed with the U.S. Securities and
Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Securities registered pursuant to Section 12(g) of the Act: None
Yes ☑ No ☐
15,552,752,000 shares of common stock were issued and outstanding as of October 20, 2023.
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of March 31, 2023, the last business
day of the Registrant's most recently completed second fiscal quarter, was approximately $2,591,165,000,000. Solely for purposes of this
disclosure, shares of common stock held by executive officers and directors of the Registrant as of such date have been excluded because such
persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive
determination for any other purposes.
Yes ☐ No ☑
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included
in the filing reflect the correction of an error to previously issued financial statements.
☑
Indicate by check mark whether the Registrant has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☑
Large accelerated filer
Non-accelerated filer
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company," and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Yes ☑ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☑ No ☐
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.
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Accelerated filer
Smaller reporting company
Emerging growth company
The Company manages its business primarily on a geographic basis. The Company's reportable segments consist of the
Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe
includes European countries, as well as India, the Middle East and Africa. Greater China includes China mainland, Hong Kong
and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company's other reportable
segments. Although the reportable segments provide similar hardware and software products and similar services, each one is
managed separately to better align with the location of the Company's customers and distribution partners and the unique market
dynamics of each geographic region.
UNITED STATES
The Company's customers are primarily in the consumer, small and mid-sized business, education, enterprise and government
markets. The Company sells its products and resells third-party products in most of its major markets directly to customers
through its retail and online stores and its direct sales force. The Company also employs a variety of indirect distribution
channels, such as third-party cellular network carriers, wholesalers, retailers and resellers. During 2023, the Company's net
sales through its direct and indirect distribution channels accounted for 37% and 63%, respectively, of total net sales.
Because of the following factors, as well as other factors affecting the Company's results of operations and financial condition,
past financial performance should not be considered to be a reliable indicator of future performance, and investors should not
use historical trends to anticipate results or trends in future periods. This discussion of risk factors contains forward-looking
statements.
This section should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and accompanying notes in Part II, Item 8, "Financial
Statements and Supplementary Data" of this Form 10-K.
Macroeconomic and Industry Risks
The Company's operations and performance depend significantly on global and regional economic conditions and
adverse economic conditions can materially adversely affect the Company's business, results of operations and financial
condition.
The Company has international operations with sales outside the U.S. representing a majority of the Company's total net sales.
In addition, the Company's global supply chain is large and complex and a majority of the Company's supplier facilities, including
manufacturing and assembly sites, are located outside the U.S. As a result, the Company's operations and performance depend
significantly on global and regional economic conditions.
Adverse macroeconomic conditions, including slow growth or recession, high unemployment, inflation, tighter credit, higher
interest rates, and currency fluctuations, can adversely impact consumer confidence and spending and materially adversely
affect demand for the Company's products and services. In addition, consumer confidence and spending can be materially
adversely affected in response to changes in fiscal and monetary policy, financial market volatility, declines in income or asset
values, and other economic factors.
In addition to an adverse impact on demand for the Company's products and services, uncertainty about, or a decline in, global
or regional economic conditions can have a significant impact on the Company's suppliers, contract manufacturers, logistics
providers, distributors, cellular network carriers and other channel partners, and developers. Potential outcomes include financial
instability; inability to obtain credit to finance business operations; and insolvency.
Adverse economic conditions can also lead to increased credit and collectibility risk on the Company's trade receivables; the
failure of derivative counterparties and other financial institutions; limitations on the Company's ability to issue new debt; reduced
liquidity; and declines in the fair values of the Company's financial instruments. These and other impacts can materially
adversely affect the Company's business, results of operations, financial condition and stock price.
The Company's business can be impacted by political events, trade and other international disputes, war, terrorism,
natural disasters, public health issues, industrial accidents and other business interruptions.
Political events, trade and other international disputes, war, terrorism, natural disasters, public health issues, industrial accidents
and other business interruptions can harm or disrupt international commerce and the global economy, and could have a material
adverse effect on the Company and its customers, suppliers, contract manufacturers, logistics providers, distributors, cellular
network carriers and other channel partners.
Apple Inc. | 2023 Form 10-K | 5
The Company has a large, global business with sales outside the U.S. representing a majority of the Company's total net sales,
and the Company believes that it generally benefits from growth in international trade. Substantially all of the Company's
manufacturing is performed in whole or in part by outsourcing partners located primarily in China mainland, India, Japan, South
Korea, Taiwan and Vietnam. Restrictions on international trade, such as tariffs and other controls on imports or exports of goods,
technology or data, can materially adversely affect the Company's operations and supply chain and limit the Company's ability to
offer and distribute its products and services to customers. The impact can be particularly significant if these restrictive measures
apply to countries and regions where the Company derives a significant portion of its revenues and/or has significant supply
chain operations. Restrictive measures can require the Company to take various actions, including changing suppliers,
restructuring business relationships, and ceasing to offer third-party applications on its platforms. Changing the Company's
operations in accordance with new or changed restrictions on international trade can be expensive, time-consuming and
disruptive to the Company's operations. Such restrictions can be announced with little or no advance notice and the Company
may not be able to effectively mitigate all adverse impacts from such measures. For example, tensions between governments,
including the U.S. and China, have in the past led to tariffs and other restrictions being imposed on the Company's business. If
disputes and conflicts further escalate in the future, actions by governments in response could be significantly more severe and
restrictive and could materially adversely affect the Company's business. Political uncertainty surrounding trade and other
international disputes could also have a negative effect on consumer confidence and spending, which could adversely affect the
Company's business.
Many of the Company's operations and facilities, as well as critical business operations of the Company's suppliers and contract
manufacturers, are in locations that are prone to earthquakes and other natural disasters. In addition, such operations and
facilities are subject to the risk of interruption by fire, power shortages, nuclear power plant accidents and other industrial
accidents, terrorist attacks and other hostile acts, ransomware and other cybersecurity attacks, labor disputes, public health
issues, including pandemics such as the COVID-19 pandemic, and other events beyond the Company's control. Global climate
change is resulting in certain types of natural disasters, such as droughts, floods, hurricanes and wildfires, occurring more
frequently or with more intense effects. Such events can make it difficult or impossible for the Company to manufacture and
deliver products to its customers, create delays and inefficiencies in the Company's supply and manufacturing chain, and result
in slowdowns and outages to the Company's service offerings, and negatively impact consumer spending and demand in
affected areas. Following an interruption to its business, the Company can require substantial recovery time, experience
significant expenditures to resume operations, and lose significant sales. Because the Company relies on single or limited
sources for the supply and manufacture of many critical components, a business interruption affecting such sources would
exacerbate any negative consequences to the Company.
The Company's operations are also subject to the risks of industrial accidents at its suppliers and contract manufacturers. While
the Company's suppliers are required to maintain safe working environments and operations, an industrial accident could occur
and could result in serious injuries or loss of life, disruption to the Company's business, and harm to the Company's reputation.
Major public health issues, including pandemics such as the COVID-19 pandemic, have adversely affected, and could in the
future materially adversely affect, the Company due to their impact on the global economy and demand for consumer products;
the imposition of protective public safety measures, such as stringent employee travel restrictions and limitations on freight
services and the movement of products between regions; and disruptions in the Company's operations, supply chain and sales
and distribution channels, resulting in interruptions to the supply of current products and offering of existing services, and delays
in production ramps of new products and development of new services.
The Company's business, reputation, results of operations, financial condition and stock price can be affected by a number of
factors, whether currently known or unknown, including those described below. When any one or more of these risks materialize
from time to time, the Company's business, reputation, results of operations, financial condition and stock price can be materially
and adversely affected.
While the Company maintains insurance coverage for certain types of losses, such insurance coverage may be insufficient to
cover all losses that may arise.
The Company's products and services are offered in highly competitive global markets characterized by aggressive price
competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short
product life cycles, evolving industry standards, continual improvement in product price and performance characteristics, rapid
adoption of technological advancements by competitors, and price sensitivity on the part of consumers and businesses.
The Company's ability to compete successfully depends heavily on ensuring the continuing and timely introduction of innovative
new products, services and technologies to the marketplace. The Company designs and develops nearly the entire solution for
its products, including the hardware, operating system, numerous software applications and related services. As a result, the
Company must make significant investments in R&D. There can be no assurance these investments will achieve expected
returns, and the Company may not be able to develop and market new products and services successfully.
Apple Inc. | 2023 Form 10-K | 6
The Company currently holds a significant number of patents, trademarks and copyrights and has registered, and applied to
register, additional patents, trademarks and copyrights. In contrast, many of the Company's competitors seek to compete
primarily through aggressive pricing and very low cost structures, and by imitating the Company's products and infringing on
its intellectual property. Effective intellectual property protection is not consistently available in every country in which the
Company operates. If the Company is unable to continue to develop and sell innovative new products with attractive margins or if
competitors infringe on the Company's intellectual property, the Company's ability to maintain a competitive advantage could be
materially adversely affected.
The Company has a minority market share in the global smartphone, personal computer and tablet markets. The Company faces
substantial competition in these markets from companies that have significant technical, marketing, distribution and other
resources, as well as established hardware, software and digital content supplier relationships. In addition, some of the
Company's competitors have broader product lines, lower-priced products and a larger installed base of active devices.
Competition has been particularly intense as competitors have aggressively cut prices and lowered product margins. Certain
competitors have the resources, experience or cost structures to provide products at little or no profit or even at a loss. Some of
the markets in which the Company competes have from time to time experienced little to no growth or contracted overall.
Additionally, the Company faces significant competition as competitors imitate the Company's product features and applications
within their products or collaborate to offer solutions that are more competitive than those they currently offer. The Company also
expects competition to intensify as competitors imitate the Company's approach to providing components seamlessly within their
offerings or work collaboratively to offer integrated solutions.
The Company's services also face substantial competition, including from companies that have significant resources and
experience and have established service offerings with large customer bases. The Company competes with business models
that provide content to users for free. The Company also competes with illegitimate means to obtain third-party digital content
and applications.
Business Risks
To remain competitive and stimulate customer demand, the Company must successfully manage frequent introductions
and transitions of products and services.
Due to the highly volatile and competitive nature of the markets and industries in which the Company competes, the Company
must continually introduce new products, services and technologies, enhance existing products and services, effectively
stimulate customer demand for new and upgraded products and services, and successfully manage the transition to these new
and upgraded products and services. The success of new product and service introductions depends on a number of factors,
including timely and successful development, market acceptance, the Company's ability to manage the risks associated with new
technologies and production ramp-up issues, the availability of application software for the Company's products, the effective
management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products
in appropriate quantities and at expected costs to meet anticipated demand, and the risk that new products and services may
have quality or other defects or deficiencies. There can be no assurance the Company will successfully manage future
introductions and transitions of products and services.
The Company depends on component and product manufacturing and logistical services provided by outsourcing
partners, many of which are located outside of the U.S.
Substantially all of the Company's manufacturing is performed in whole or in part by outsourcing partners located primarily in
China mainland, India, Japan, South Korea, Taiwan and Vietnam, and a significant concentration of this manufacturing is
currently performed by a small number of outsourcing partners, often in single locations. Changes or additions to the Company's
supply chain require considerable time and resources and involve significant risks and uncertainties. The Company has also
outsourced much of its transportation and logistics management. While these arrangements can lower operating costs, they also
reduce the Company's direct control over production and distribution. Such diminished control has from time to time and may in
the future have an adverse effect on the quality or quantity of products manufactured or services provided, or adversely affect the
Company's flexibility to respond to changing conditions. Although arrangements with these partners may contain provisions for
product defect expense reimbursement, the Company generally remains responsible to the consumer for warranty and out-of-
warranty service in the event of product defects and experiences unanticipated product defect liabilities from time to time. While
the Company relies on its partners to adhere to its supplier code of conduct, violations of the supplier code of conduct occur from
time to time and can materially adversely affect the Company's business, reputation, results of operations and financial condition.
Apple Inc. | 2023 Form 10-K | 7
Markets and Distribution
Global markets for the Company's products and services are highly competitive and subject to rapid technological
change, and the Company may be unable to compete effectively in these markets.
Risk Factors
The Company's business, results of operations and financial condition depend substantially on the Company's ability to
continually improve its products and services to maintain their functional and design advantages. There can be no assurance the
Company will be able to continue to provide products and services that compete effectively.
Apple Inc. | 2023 Form 10-K | 4
Competition
Item 1A.
The markets for the Company's products and services are highly competitive, and are characterized by aggressive price
competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short
product life cycles, evolving industry standards, continual improvement in product price and performance characteristics, rapid
adoption of technological advancements by competitors, and price sensitivity on the part of consumers and businesses. Many of
the Company's competitors seek to compete primarily through aggressive pricing and very low cost structures, and by imitating
the Company's products and infringing on its intellectual property.
Apple Inc. | 2023 Form 10-K | 2
The Company's ability to compete successfully depends heavily on ensuring the continuing and timely introduction of innovative
new products, services and technologies to the marketplace. The Company designs and develops nearly the entire solution for
its products, including the hardware, operating system, numerous software applications and related services. Principal
competitive factors important to the Company include price, product and service features (including security features), relative
price and performance, product and service quality and reliability, design innovation, a strong third-party software and
accessories ecosystem, marketing and distribution capability, service and support, and corporate reputation.
Supply of Components
Although most components essential to the Company's business are generally available from multiple sources, certain
components are currently obtained from single or limited sources. The Company also competes for various components with
other participants in the markets for smartphones, personal computers, tablets, wearables and accessories. Therefore, many
components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide
shortage and significant commodity pricing fluctuations.
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 their manufacturing capacities have
increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to
concentrate on the production of common components instead of components customized to meet the Company's requirements.
The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the
Company will be able to extend or renew these agreements on similar terms, or at all.
Research and Development
Because the industries in which the Company competes are characterized by rapid technological advances, the Company's
ability to compete successfully depends heavily upon its ability to ensure a continual and timely flow of competitive products,
services and technologies to the marketplace. The Company continues to develop new technologies to enhance existing
products and services, and to expand the range of its offerings through research and development ("R&D"), licensing of
intellectual property and acquisition of third-party businesses and technology.
Intellectual Property
The Company currently holds a broad collection of intellectual property rights relating to certain aspects of its hardware devices,
accessories, software and services. This includes patents, designs, copyrights, trademarks and other forms of intellectual
property rights in the U.S. and various foreign countries. Although the Company believes the ownership of such intellectual
property rights is an important factor in differentiating its business and that its success does depend in part on such ownership,
the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.
The Company regularly files patent, design, copyright and trademark applications to protect innovations arising from its research,
development, design and marketing, and is currently pursuing thousands of applications around the world. Over time, the
Company has accumulated a large portfolio of issued and registered intellectual property rights around the world. No single
intellectual property right is solely responsible for protecting the Company's products and services. The Company believes the
duration of its intellectual property rights is adequate relative to the expected lives of its products and services.
In addition to Company-owned intellectual property, many of the Company's products and services are designed to include
intellectual property owned by third parties. It may be necessary in the future to seek or renew licenses relating to various
aspects of the Company's products, processes and services. While the Company has generally been able to obtain such
licenses on commercially reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future
on reasonable terms or at all.
Apple Inc. | 2023 Form 10-K | 3
The Company is focused on expanding its market opportunities related to smartphones, personal computers, tablets, wearables
and accessories, and services. The Company faces substantial competition in these markets from companies that have
significant technical, marketing, distribution and other resources, as well as established hardware, software, and service offerings
with large customer bases. In addition, some of the Company's competitors have broader product lines, lower-priced products
and a larger installed base of active devices. Competition has been particularly intense as competitors have aggressively cut
prices and lowered product margins. Certain competitors have the resources, experience or cost structures to provide products
at little or no profit or even at a loss. The Company's services compete with business models that provide content to users for
free and use illegitimate means to obtain third-party digital content and applications. The Company faces significant competition
as competitors imitate the Company's product features and applications within their products, or collaborate to offer integrated
solutions that are more competitive than those they currently offer.
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 and service introductions can significantly impact net sales, cost of
sales and operating expenses. The timing of product introductions can also impact the Company's net sales to its indirect
distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an
older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and
distributors anticipate a product introduction.
Business Seasonality and Product Introductions
The Company's Annual Reports 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 U.S. Securities and Exchange Commission (the "SEC"). Such reports and other information
filed by the Company with the SEC are available free of charge at investor.apple.com/investor-relations/sec-filings/default.aspx
when such reports are available on the SEC's website. The Company periodically provides certain information for investors on its
corporate website, www.apple.com, and its investor relations website, investor.apple.com. This includes press releases and
other information about financial performance, information on environmental, social and governance matters, and details related
to the Company's annual meeting of shareholders. The information contained on the websites referenced in this Form 10-K is not
incorporated by reference into this filing. Further, the Company's references to website URLs are intended to be inactive textual
references only.
The Company is committed to protecting its team members everywhere it operates. The Company identifies potential workplace
risks in order to develop measures to mitigate possible hazards. The Company supports employees with general safety, security
and crisis management training, and by putting specific programs in place for those working in potentially high-hazard
environments. Additionally, the Company works to protect the safety and security of its team members, visitors and customers
through its global security team.
Available Information
The Company believes that open and honest communication among team members, managers and leaders helps create an
open, collaborative work environment where everyone can contribute, grow and succeed. Team members are encouraged to
come to their managers with questions, feedback or concerns, and the Company conducts surveys that gauge employee
sentiment in areas like career development, manager performance and inclusivity.
Engagement
The Company is committed to its vision to build and sustain a more inclusive workforce that is representative of the communities
it serves. The Company continues to work to increase diverse representation at every level, foster an inclusive culture, and
support equitable pay and access to opportunity for all employees.
Health and Safety
Inclusion and Diversity
The Company believes that compensation should be competitive and equitable, and should enable employees to share in the
Company's success. The Company recognizes its people are most likely to thrive when they have the resources to meet their
needs and the time and support to succeed in their professional and personal lives. In support of this, the Company offers a wide
variety of benefits for employees around the world and invests in tools and resources that are designed to support employees'
individual growth and development.
Compensation and Benefits
The Company is an equal opportunity employer committed to inclusion and diversity and to providing a workplace free of
harassment or discrimination.
Workplace Practices and Policies
The Company believes it has a talented, motivated and dedicated team, and works to create an inclusive, safe and supportive
environment for all of its team members. As of September 30, 2023, the Company had approximately 161,000 full-time
equivalent employees.
Human Capital
Compliance with these laws and regulations is onerous and expensive. New and changing laws and regulations can adversely
affect the Company's business by increasing the Company's costs, limiting the Company's ability to offer a product, service or
feature to customers, imposing changes to the design of the Company's products and services, impacting customer demand for
the Company's products and services, and requiring changes to the Company's supply chain and its business. New and
changing laws and regulations can also create uncertainty about how such laws and regulations will be interpreted and applied.
These risks and costs may increase as the Company's products and services are introduced into specialized applications,
including health and financial services. The Company has implemented policies and procedures designed to ensure compliance
with applicable laws and regulations, but there can be no assurance the Company's employees, contractors or agents will not
violate such laws and regulations or the Company's policies and procedures. If the Company is found to have violated laws and
regulations, it could materially adversely affect the Company's business, reputation, results of operations and financial condition.
Regulatory changes and other actions that materially adversely affect the Company's business may be announced with little or
no advance notice and the Company may not be able to effectively mitigate all adverse impacts from such measures. For
example, the Company is subject to changing regulations relating to the export and import of its products. Although the Company
has programs, policies and procedures in place that are designed to satisfy regulatory requirements, there can be no assurance
that such policies and procedures will be effective in preventing a violation or a claim of a violation. As a result, the Company's
products could be banned, delayed or prohibited from importation, which could materially adversely affect the Company's
business, reputation, results of operations and financial condition.
Expectations relating to environmental, social and governance considerations and related reporting obligations expose
the Company to potential liabilities, increased costs, reputational harm, and other adverse effects on the Company's
business.
Many governments, regulators, investors, employees, customers and other stakeholders are increasingly focused on
environmental, social and governance considerations relating to businesses, including climate change and greenhouse gas
emissions, human and civil rights, and diversity, equity and inclusion. In addition, the Company makes statements about its goals
and initiatives through its various non-financial reports, information provided on its website, press statements and other
communications. Responding to these environmental, social and governance considerations and implementation of these goals
and initiatives involves risks and uncertainties, requires investments, and depends in part on third-party performance or data that
is outside the Company's control. The Company cannot guarantee that it will achieve its announced environmental, social and
governance goals and initiatives. In addition, some stakeholders may disagree with the Company's goals and initiatives. Any
failure, or perceived failure, by the Company to achieve its goals, further its initiatives, adhere to its public statements, comply
with federal, state or international environmental, social and governance laws and regulations, or meet evolving and varied
stakeholder expectations and standards could result in legal and regulatory proceedings against the Company and materially
adversely affect the Company's business, reputation, results of operations, financial condition and stock price.
The technology industry, including, in some instances, the Company, is subject to intense media, political and regulatory
scrutiny, which exposes the Company to increasing regulation, government investigations, legal actions and penalties.
From time to time, the Company has made changes to its App Store, including actions taken in response to litigation,
competition, market conditions and legal and regulatory requirements. The Company expects to make further business changes
in the future, including as a result of legislative initiatives impacting the App Store, such as the EU Digital Markets Act, which the
Company is required to comply with by March 2024, or similar laws in other jurisdictions. Changes have included how developers
communicate with consumers outside the App Store regarding alternative purchasing mechanisms. Future changes could also
affect what the Company charges developers for access to its platforms, how it manages distribution of apps outside of the App
Store, and how and to what extent it allows developers to communicate with consumers inside the App Store regarding
alternative purchasing mechanisms.
Further, the Company has commercial relationships with other companies in the technology industry that are or may become
subject to investigations and litigation that, if resolved against those other companies, could materially adversely affect the
Company's commercial relationships with those business partners and materially adversely affect the Company's business,
results of operations and financial condition. For example, the Company earns revenue from licensing arrangements with other
companies to offer their search services on the Company's platforms and applications, and certain of these arrangements are
currently subject to government investigations and legal proceedings.
The Company is also currently subject to antitrust investigations in various jurisdictions around the world, which can result in
legal proceedings and claims against the Company that could, individually or in the aggregate, have a materially adverse impact
on the Company's business, results of operations and financial condition. For example, the Company is the subject of
investigations in Europe and other jurisdictions relating to App Store terms and conditions. If such investigations result in adverse
findings against the Company, the Company could be exposed to significant fines and may be required to make changes to its
App Store business, all of which could materially adversely affect the Company's business, results of operations and financial
condition. The Company is also subject to litigation relating to the App Store, which has resulted in changes to the Company's
business practices, and may in the future result in further changes.
The Company is subject to an increasing number of federal, state and international laws relating to the collection, use, retention,
security and transfer of various types of personal information. In many cases, these laws apply not only to third-party
transactions, but also restrict transfers of personal information among the Company and its international subsidiaries. Several
jurisdictions have passed laws in this area, and additional jurisdictions are considering imposing additional restrictions or have
laws that are pending. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with
emerging and changing requirements causes the Company to incur substantial costs and has required and may in the future
require the Company to change its business practices. Noncompliance could result in significant penalties or legal liability.
There can be no assurance the Company's business will not be materially adversely affected, individually or in the aggregate, by
the outcomes of such investigations, litigation or changes to laws and regulations in the future. Changes to the Company's
business practices to comply with new laws and regulations or in connection with other legal proceedings could negatively
impact the reputation of the Company's products for privacy and security and otherwise adversely affect the experience for users
of the Company's products and services, and result in harm to the Company's reputation, loss of competitive advantage, poor
market acceptance, reduced demand for products and services, and lost sales.
The Company's business is subject to a variety of U.S. and international laws, rules, policies and other obligations
regarding data protection.
Apple Inc. | 2023 Form 10-K | 13
The Company's global operations are subject to complex and changing laws and regulations on subjects, including antitrust;
privacy, data security and data localization; consumer protection; advertising, sales, billing and e-commerce; financial services
and technology; product liability; intellectual property ownership and infringement; digital platforms; machine learning and
artificial intelligence; internet, telecommunications and mobile communications; media, television, film and digital content;
availability of third-party software applications and services; labor and employment; anticorruption; import, export and trade;
foreign exchange controls and cash repatriation restrictions; anti-money laundering; foreign ownership and investment; tax; and
environmental, health and safety, including electronic waste, recycling, product design and climate change.
Regardless of the merit of particular claims, defending against litigation or responding to government investigations can be
expensive, time-consuming and disruptive to the Company's operations. In recognition of these considerations, the Company
may enter into agreements or other arrangements to settle litigation and resolve such challenges. There can be no assurance
such agreements can be obtained on acceptable terms or that litigation will not occur. These agreements can also significantly
increase the Company's cost of sales and operating expenses and require the Company to change its business practices and
limit the Company's ability to offer certain products and services.
Apple Inc. | 2023 Form 10-K | 12
While the Company maintains insurance coverage for certain types of claims, such insurance coverage may be insufficient to
cover all losses or all types of claims that may arise.
The outcome of litigation or government investigations is inherently uncertain. If one or more legal matters were resolved against
the Company or an indemnified third party in a reporting period for amounts above management's expectations, the Company's
results of operations and financial condition for that reporting period could be materially adversely affected. Further, such an
outcome can result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits,
remedial corporate measures or injunctive relief against the Company, and has from time to time required, and can in the future
require, the Company to change its business practices and limit the Company's ability to offer certain products and services, all
of which could materially adversely affect the Company's business, reputation, results of operations and financial condition.
Except as described in Part I, Item 3 of this Form 10-K under the heading "Legal Proceedings" and in Part II, Item 8 of this Form
10-K in the Notes to Consolidated Financial Statements in Note 12, "Commitments, Contingencies and Supply Concentrations"
under the heading "Contingencies," in the opinion of management, there was not at least a reasonable possibility the Company
may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted
legal and other claims.
The Company has faced and continues to face a significant number of patent claims relating to its cellular-enabled products, and
new claims may arise in the future, including as a result of new legal or regulatory frameworks. For example, technology and
other patent-holding companies frequently assert their patents and seek royalties and often enter into litigation based on
allegations of patent infringement or other violations of intellectual property rights. The Company is vigorously defending
infringement actions in courts in several U.S. jurisdictions, as well as internationally in various countries. The plaintiffs in these
actions frequently seek injunctions and substantial damages.
The Company is subject to various claims, legal proceedings and government investigations that have arisen in the ordinary
course of business and have not yet been fully resolved, and new matters may arise in the future. In addition, agreements
entered into by the Company sometimes include indemnification provisions which can subject the Company to costs and
damages in the event of a claim against an indemnified third party. The number of claims, legal proceedings and government
investigations involving the Company, and the alleged magnitude of such claims, proceedings and government investigations,
has generally increased over time and may continue to increase.
The Company's business, results of operations and financial condition could be adversely impacted by unfavorable
results of legal proceedings or government investigations.
Legal and Regulatory Compliance Risks
The Company's retail operations are subject to many factors that pose risks and uncertainties and could adversely impact the
Company's business, results of operations and financial condition, including macroeconomic factors that could have an adverse
effect on general retail activity. Other factors include the Company's ability to: manage costs associated with retail store
construction and operation; manage relationships with existing retail partners; manage costs associated with fluctuations in the
value of retail inventory; and obtain and renew leases in quality retail locations at a reasonable cost.
The Company makes statements about its use and disclosure of personal information through its privacy policy, information
provided on its website, press statements and other privacy notices provided to customers. Any failure by the Company to
comply with these public statements or with other federal, state or international privacy or data protection laws and regulations
could result in inquiries or proceedings against the Company by governmental entities or others. In addition to reputational
impacts, penalties could include ongoing audit requirements and significant legal liability.
The Company's retail stores are subject to numerous risks and uncertainties.
The Company is subject to complex and changing laws and regulations worldwide, which exposes the Company to
potential liabilities, increased costs and other adverse effects on the Company's business.
In addition to the risks generally relating to the collection, use, retention, security and transfer of personal information, the
Company is also subject to specific obligations relating to information considered sensitive under applicable laws, such as health
data, financial data and biometric data. Health data and financial data are subject to additional privacy, security and breach
notification requirements, and the Company is subject to audit by governmental authorities regarding the Company's compliance
with these obligations. If the Company fails to adequately comply with these rules and requirements, or if health data or financial
data is handled in a manner not permitted by law or under the Company's agreements with healthcare or financial institutions,
the Company can be subject to litigation or government investigations, and can be liable for associated investigatory expenses,
and can also incur significant fees or fines.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland and Singapore, where a
number of the Company's subsidiaries are organized. Due to economic and political conditions, tax laws and tax rates for income
taxes and other non-income taxes in various jurisdictions may be subject to significant change. For example, the Organisation for
Economic Co-operation and Development continues to advance proposals for modernizing international tax rules, including the
introduction of global minimum tax standards. The Company's effective tax rates are affected by changes in the mix of earnings
in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, the introduction of
new taxes, and changes in tax laws or their interpretation. The application of tax laws may be uncertain, require significant
judgment and be subject to differing interpretations.
Apple Inc. | 2023 Form 10-K | 14
The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may
involve significant risks and uncertainties, including distraction of management from current operations, greater-than-expected
liabilities and expenses, economic, political, legal and regulatory challenges associated with operating in new businesses,
regions or countries, inadequate return on capital, potential impairment of tangible and intangible assets, and significant write-
offs. Investment and acquisition transactions are exposed to additional risks, including failing to obtain required regulatory
approvals on a timely basis or at all, or the imposition of onerous conditions that could delay or prevent the Company from
completing a transaction or otherwise limit the Company's ability to fully realize the anticipated benefits of a transaction. These
new ventures are inherently risky and may not be successful. The failure of any significant investment could materially adversely
affect the Company's business, reputation, results of operations and financial condition.
Item 2.
Apple Inc. | 2023 Form 10-K | 16
Not applicable.
Item 1C. Cybersecurity
None.
Item 1B. Unresolved Staff Comments
The Company's stock has experienced substantial price volatility in the past and may continue to do so in the future. Additionally,
the Company, the technology industry and the stock market as a whole have, from time to time, experienced extreme stock price
and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies' operating
performance. Price volatility may cause the average price at which the Company repurchases its stock in a given period to
exceed the stock's price at a given point in time. The Company believes the price of its stock should reflect expectations of future
growth and profitability. The Company also believes the price of its stock should reflect expectations that its cash dividend will
continue at current levels or grow, and that its current share repurchase program will be fully consummated. Future dividends are
subject to declaration by the Company's Board of Directors, and the Company's share repurchase program does not obligate it
to acquire any specific number of shares. If the Company fails to meet expectations related to future growth, profitability,
dividends, share repurchases or other market expectations, the price of the Company's stock may decline significantly, which
could have a material adverse impact on investor confidence and employee retention.
The price of the Company's stock is subject to volatility.
General Risks
The Company is also subject to the examination of its tax returns and other tax matters by the U.S. Internal Revenue Service
and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome
resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the
outcome of these examinations. If the Company's effective tax rates were to increase, or if the ultimate determination of the
Company's taxes owed is for an amount in excess of amounts previously accrued, the Company's business, results of
operations and financial condition could be materially adversely affected.
Payment card data is also subject to additional requirements. Under payment card rules and obligations, if cardholder
information is potentially compromised, the Company can be liable for associated investigatory expenses and can also incur
significant fees or fines if the Company fails to follow payment card industry data security standards. The Company could also
experience a significant increase in payment card transaction costs or lose the ability to process payment cards if it fails to follow
payment card industry data security standards, which could materially adversely affect the Company's business, reputation,
results of operations and financial condition.
The Company is subject to changes in tax rates, the adoption of new U.S. or international tax legislation and exposure to
additional tax liabilities.
Apple Inc. | 2023 Form 10-K | 15
The Company's investments can be negatively affected by changes in liquidity, credit deterioration, financial results, market and
economic conditions, political risk, sovereign risk, interest rate fluctuations or other factors. As a result, the value and liquidity of
the Company's cash, cash equivalents and marketable securities may fluctuate substantially. Therefore, although the Company
has not realized any significant losses on its cash, cash equivalents and marketable securities, future fluctuations in their value
could result in significant losses and could have a material adverse impact on the Company's results of operations and financial
condition.
The Company is exposed to credit risk and fluctuations in the values of its investment portfolio.
Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Company's foreign
currency-denominated sales and earnings, could cause the Company to reduce international pricing or incur losses on its
foreign currency derivative instruments, thereby limiting the benefit. Additionally, strengthening of foreign currencies may
increase the Company's cost of product components denominated in those currencies, thus adversely affecting gross margins.
The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to
fluctuations in foreign exchange rates. The use of such hedging activities may not be effective to offset any, or more than a
portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are
in place.
The weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company's foreign
currency-denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing
demand for the Company's products. In some circumstances, for competitive or other reasons, the Company may decide not to
raise international pricing to offset the U.S. dollar's strengthening, which would adversely affect the U.S. dollar value of the gross
margins the Company earns on foreign currency-denominated sales.
The Company's primary exposure to movements in foreign exchange rates relates to non-U.S. dollar-denominated sales, cost
of sales and operating expenses worldwide. Gross margins on the Company's products in foreign countries and on products that
include components obtained from foreign suppliers have in the past been adversely affected and could in the future be
materially adversely affected by foreign exchange rate fluctuations.
The Company's financial performance is subject to risks associated with changes in the value of the U.S. dollar relative
to local currencies.
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 and service introductions can significantly impact net sales, cost of
sales and operating expenses. Further, the Company generates a significant portion of its net sales from a single product and a
decline in demand for that product could significantly impact quarterly net sales. The Company could also be subject to
unexpected developments, such as lower-than-anticipated demand for the Company's products or services, issues with new
product or service introductions, information technology system failures or network disruptions, or failure of one of the
Company's logistics, components supply, or manufacturing partners.
The Company's profit margins vary across its products, services, geographic segments and distribution channels. For example,
the gross margins on the Company's products and services vary significantly and can change over time. The Company's gross
margins are subject to volatility and downward pressure due to a variety of factors, including: continued industry-wide global
product pricing pressures and product pricing actions that the Company may take in response to such pressures; increased
competition; the Company's ability to effectively stimulate demand for certain of its products and services; compressed product
life cycles; supply shortages; potential increases in the cost of components, outside manufacturing services, and developing,
acquiring and delivering content for the Company's services; the Company's ability to manage product quality and warranty costs
effectively; shifts in the mix of products and services, or in the geographic, currency or channel mix, including to the extent that
regulatory changes require the Company to modify its product and service offerings; fluctuations in foreign exchange rates;
inflation and other macroeconomic pressures; and the introduction of new products or services, including new products or
services with higher cost structures. These and other factors could have a materially adverse impact on the Company's results of
operations and financial condition.
The Company expects its quarterly net sales and results of operations to fluctuate.
Financial Risks
The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments
related to long-term supply agreements, and this risk is heightened during periods when economic conditions worsen.
The Company distributes its products and certain of its services through third-party cellular network carriers, wholesalers,
retailers and resellers. The Company also sells its products and services directly to small and mid-sized businesses and
education, enterprise and government customers. A substantial majority of the Company's outstanding trade receivables are not
covered by collateral, third-party bank support or financing arrangements, or credit insurance, and a significant portion of the
Company's trade receivables can be concentrated within cellular network carriers or other resellers. The Company's exposure to
credit and collectibility risk on its trade receivables is higher in certain international markets and its ability to mitigate such risks
may be limited. The Company also has unsecured vendor non-trade receivables resulting from purchases of components by
outsourcing partners and other vendors that manufacture subassemblies or assemble final products for the Company. In
addition, the Company has made prepayments associated with long-term supply agreements to secure supply of inventory
components. As of September 30, 2023, the Company's vendor non-trade receivables and prepayments related to long-term
supply agreements were concentrated among a few individual vendors located primarily in Asia. While the Company has
procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables, as well as long-term
prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.
Investment in new business strategies and acquisitions could disrupt the Company's ongoing business, present risks not
originally contemplated and materially adversely affect the Company's business, reputation, results of operations and
financial condition.
The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated
demand, or for which cost exceeds net realizable value. The Company also accrues necessary cancellation fee reserves for
orders of excess products and components. The Company reviews long-lived assets, including capital assets held at its
suppliers' facilities and inventory prepayments, for impairment whenever events or circumstances indicate the assets may not be
recoverable. If the Company determines that an impairment has occurred, it records a write-down equal to the amount by which
the carrying value of the asset exceeds its fair value. Although the Company believes its inventory, capital assets, inventory
prepayments and other assets and purchase commitments are currently recoverable, there can be no assurance the Company
will not incur write-downs, fees, impairments and other charges given the rapid and unpredictable pace of product obsolescence
in the industries in which the Company competes.
While the Company maintains insurance coverage that is intended to address certain aspects of data security risks, such
insurance coverage may be insufficient to cover all losses or all types of claims that may arise.
The Company relies on access to third-party intellectual property, which may not be available to the Company on
commercially reasonable terms or at all.
The Company orders components for its products and builds inventory in advance of product announcements and shipments.
Manufacturing purchase obligations cover the Company's forecasted component and manufacturing requirements, typically for
periods up to 150 days. Because the Company's markets are volatile, competitive and subject to rapid technology and price
changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient amounts of components
or products, or not fully utilize firm purchase commitments.
The Company is exposed to the risk of write-downs on the value of its inventory and other assets, in addition to purchase
commitment cancellation risk.
Apple Inc. | 2023 Form 10-K 18
The Company offers complex hardware and software products and services that can be affected by design and manufacturing
defects. Sophisticated operating system software and applications, such as those offered by the Company, often have issues
that can unexpectedly interfere with the intended operation of hardware or software products and services. Defects can also exist
in components and products the Company purchases from third parties. Component defects could make the Company's
products unsafe and create a risk of environmental or property damage and personal injury. These risks may increase as the
Company's products are introduced into specialized applications, including health. In addition, the Company's service offerings
can have quality issues and from time to time experience outages, service slowdowns or errors. As a result, from time to time the
Company's services have not performed as anticipated and may not meet customer expectations. There can be no assurance
the Company will be able to detect and fix all issues and defects in the hardware, software and services it offers. Failure to do so
can result in widespread technical and performance issues affecting the Company's products and services. In addition, the
Company can be exposed to product liability claims, recalls, product replacements or modifications, write-offs of inventory,
property, plant and equipment or intangible assets, and significant warranty and other expenses, including litigation costs and
regulatory fines. Quality problems can also adversely affect the experience for users of the Company's products and services,
and result in harm to the Company's reputation, loss of competitive advantage, poor market acceptance, reduced demand for
products and services, delay in new product and service introductions and lost sales.
The Company's products and services may be affected from time to time by design and manufacturing defects that could
materially adversely affect the Company's business and result in harm to the Company's reputation.
The Company's new products often utilize custom components available from only one source. When a component or product
uses new technologies, initial capacity constraints may exist until the suppliers' yields have matured or their manufacturing
capacities have increased. The continued availability of these components at acceptable prices, or at all, can be affected for any
number of reasons, including if suppliers decide to concentrate on the production of common components instead of components
customized to meet the Company's requirements. When the Company's supply of components for a new or existing product has
been delayed or constrained, or when an outsourcing partner has delayed shipments of completed products to the Company, the
Company's business, results of operations and financial condition have been adversely affected and future delays or constraints
could materially adversely affect the Company's business, results of operations and financial condition. The Company's business
and financial performance could also be materially adversely affected depending on the time required to obtain sufficient
quantities from the source, or to identify and obtain sufficient quantities from an alternative source.
Because the Company currently obtains certain components from single or limited sources, the Company is subject to significant
supply and pricing risks. Many components, including those that are available from multiple sources, are at times subject to
industry-wide shortages and significant commodity pricing fluctuations that can materially adversely affect the Company's
business, results of operations and financial condition. For example, the global semiconductor industry has in the past
experienced high demand and shortages of supply, which adversely affected the Company's ability to obtain sufficient quantities
of components and products on commercially reasonable terms or at all. Such disruptions could occur in the future. While the
Company has entered into agreements for the supply of many components, there can be no assurance the Company will be able
to extend or renew these agreements on similar terms, or at all. Component suppliers may suffer from poor financial conditions,
which can lead to business failure for the supplier or consolidation within a particular industry, further limiting the Company's
ability to obtain sufficient quantities of components on commercially reasonable terms or at all. The effects of global or regional
economic conditions on the Company's suppliers, described in "The Company's operations and performance depend
significantly on global and regional economic conditions and adverse economic conditions can materially adversely affect the
Company's business, results of operations and financial condition," above, can also affect the Company's ability to obtain
components. Therefore, the Company remains subject to significant risks of supply shortages and price increases that can
materially adversely affect its business, results of operations and financial condition.
Future operating results depend upon the Company's ability to obtain components in sufficient quantities on
commercially reasonable terms.
The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners,
and has made prepayments to certain of its suppliers associated with long-term supply agreements. While these arrangements
help ensure the supply of components and finished goods, if these outsourcing partners or suppliers experience severe financial
problems or other disruptions in their business, such continued supply can be reduced or terminated, and the recoverability of
manufacturing process equipment or prepayments can be negatively impacted.
The Company relies on single-source outsourcing partners in the U.S., Asia and Europe to supply and manufacture many
components, and on outsourcing partners primarily located in Asia, for final assembly of substantially all of the Company's
hardware products. Any failure of these partners to perform can have a negative impact on the Company's cost or supply of
components or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations can be
disrupted for a variety of reasons, including natural and man-made disasters, information technology system failures, commercial
disputes, armed conflict, economic, business, labor, environmental, public health or political issues, or international trade
disputes.
Item 3.
Epic Games
Legal Proceedings
Epic Games, Inc. ("Epic") filed a lawsuit in the U.S. District Court for the Northern District of California (the "District Court")
against the Company alleging violations of federal and state antitrust laws and California's unfair competition law based upon the
Company's operation of its App Store. On September 10, 2021, the District Court ruled in favor of the Company with respect to
nine out of the ten counts included in Epic's claim. The District Court found that certain provisions of the Company's App Store
Review Guidelines violate California's unfair competition law and issued an injunction enjoining the Company from prohibiting
developers from including in their apps external links that direct customers to purchasing mechanisms other than Apple in-app
purchasing. The injunction applies to apps on the U.S. storefront of the iOS and iPadOS App Store. On April 24, 2023, the U.S.
Court of Appeals for the Ninth Circuit (the “Circuit Court") affirmed the District Court's ruling. On June 7, 2023, the Company and
Epic filed petitions with the Circuit Court requesting further review of the decision. On June 30, 2023, the Circuit Court denied
both petitions. On July 17, 2023, the Circuit Court granted Apple's motion to stay enforcement of the injunction pending appeal to
the U.S. Supreme Court. If the U.S. Supreme Court denies Apple's petition, the stay of the injunction will expire.
Masimo
Masimo Corporation and Cercacor Laboratories, Inc. (together, “Masimo”) filed a complaint before the U.S. International Trade
Commission (the “ITC") alleging infringement by the Company of five patents relating to the functionality of the blood oxygen
feature in Apple Watch Series 6 and 7. In its complaint, Masimo sought a permanent exclusion order prohibiting importation to
the United States of certain Apple Watch models that include blood oxygen sensing functionality. On October 26, 2023, the ITC
entered a limited exclusion order (the "Order”) prohibiting importation and sales in the United States of Apple Watch models with
blood oxygen sensing functionality, which includes Apple Watch Series 9 and Ultra 2. The Order will not go into effect until the
end of the administrative review period, which is currently expected to end on December 25, 2023. The Company intends to
appeal the Order and seek a stay pending the appeal.
Other Legal Proceedings
The Company is subject to other legal proceedings and claims that have not been fully resolved and that have arisen in the
ordinary course of business. The Company settled certain matters during the fourth quarter of 2023 that did not individually or in
the aggregate have a material impact on the Company's financial condition or operating results. The outcome of litigation is
inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts above
management's expectations, the Company's financial condition and operating results for that reporting period could be materially
adversely affected.
Item 4. Mine Safety Disclosures
Not applicable.
Apple Inc. | 2023 Form 10-K | 17
The Company's headquarters is located in Cupertino, California. As of September 30, 2023, the Company owned or leased
facilities and land for corporate functions, R&D, data centers, retail and other purposes at locations throughout the U.S. and in
various places outside the U.S. The Company believes its existing facilities and equipment, which are used by all reportable
segments, are in good operating condition and are suitable for the conduct of its business.
The Company's products and services are designed to include intellectual property owned by third parties, which requires
licenses from those third parties. In addition, because of technological changes in the industries in which the Company currently
competes or in the future may compete, current extensive patent coverage and the rapid rate of issuance of new patents, the
Company's products and services can unknowingly infringe existing patents or intellectual property rights of others. From time to
time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties.
Based on experience and industry practice, the Company believes licenses to such third-party intellectual property can generally
be obtained on commercially reasonable terms. However, there can be no assurance the necessary licenses can be obtained on
commercially reasonable terms or at all. Failure to obtain the right to use third-party intellectual property, or to use such
intellectual property on commercially reasonable terms, can preclude the Company from selling certain products or services, or
otherwise have a material adverse impact on the Company's business, results of operations and financial condition.
The Company's future performance depends in part on support from third-party software developers.
The Company believes decisions by customers to purchase its hardware products depend in part on the availability of third-party
software applications and services. There can be no assurance third-party developers will continue to develop and maintain
software applications and services for the Company's products. If third-party software applications and services cease to be
developed and maintained for the Company's products, customers may choose not to buy the Company's products.
The Company believes the availability of third-party software applications and services for its products depends in part on the
developers' perception and analysis of the relative benefits of developing, maintaining and upgrading such software and services
for the Company's products compared to competitors' platforms, such as Android for smartphones and tablets, Windows for
personal computers and tablets, and PlayStation, Nintendo and Xbox for gaming platforms. This analysis may be based on
factors such as the market position of the Company and its products, the anticipated revenue that may be generated, expected
future growth of product sales, and the costs of developing such applications and services.
The Company has implemented systems and processes intended to secure its information technology systems and prevent
unauthorized access to or loss of sensitive data, and mitigate the impact of unauthorized access, including through the use of
encryption and authentication technologies. As with all companies, these security measures may not be sufficient for all
eventualities and may be vulnerable to hacking, ransomware attacks, employee error, malfeasance, system error, faulty
password management or other irregularities. For example, third parties can fraudulently induce the Company's or its vendors'
employees or customers into disclosing usernames, passwords or other sensitive information, which can, in turn, be used for
unauthorized access to the Company's or its vendors' systems and services. To help protect customers and the Company, the
Company deploys and makes available technologies like multifactor authentication, monitors its services and systems for
unusual activity and may freeze accounts under suspicious circumstances, which, among other things, can result in the delay or
loss of customer orders or impede customer access to the Company's products and services.
Although malicious attacks perpetrated to gain access to confidential information, including personal information, affect many
companies across various industries, the Company is at a relatively greater risk of being targeted because of its high profile and
the value of the confidential information it creates, owns, manages, stores and processes.
The Company experiences malicious attacks and other attempts to gain unauthorized access to its systems on a regular basis.
These attacks seek to compromise the confidentiality, integrity or availability of confidential information or disrupt normal
business operations, and can, among other things, impair the Company's ability to attract and retain customers for its products
and services, impact the Company's stock price, materially damage commercial relationships, and expose the Company to
litigation or government investigations, which could result in penalties, fines or judgments against the Company. Globally, attacks
are expected to continue accelerating in both frequency and sophistication with increasing use by actors of tools and techniques
that are designed to circumvent controls, avoid detection, and remove or obfuscate forensic evidence, all of which hinders the
Company's ability to identify, investigate and recover from incidents. In addition, attacks against the Company and its customers
can escalate during periods of severe diplomatic or armed conflict.
The Company's business also requires it to share confidential information with suppliers and other third parties. The Company
relies on global suppliers that are also exposed to ransomware and other malicious attacks that can disrupt business operations.
Although the Company takes steps to secure confidential information that is provided to or accessible by third parties working on
the Company's behalf, such measures are not always effective and losses or unauthorized access to, or releases of, confidential
information occur. Such incidents and other malicious attacks could materially adversely affect the Company's business,
reputation, results of operations and financial condition.
The Company's business requires it to use and store confidential information, including personal information, with respect to the
Company's customers and employees. The Company devotes significant resources to network and data security, including
through the use of encryption and other security measures intended to protect its systems and data. But these measures cannot
provide absolute security, and losses or unauthorized access to or releases of confidential information occur and could materially
adversely affect the Company's business, reputation, results of operations and financial condition.
Losses or unauthorized access to or releases of confidential information, including personal information, could subject
the Company to significant reputational, financial, legal and operational consequences.
The Company and its global supply chain are dependent on complex information technology systems and are exposed to
information technology system failures or network disruptions caused by natural disasters, accidents, power disruptions,
telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, ransomware or other
cybersecurity incidents, or other events or disruptions. System upgrades, redundancy and other continuity measures may be
ineffective or inadequate, and the Company's or its vendors' business continuity and disaster recovery planning may not be
sufficient for all eventualities. Such failures or disruptions can adversely impact the Company's business by, among other things,
preventing access to the Company's online services, interfering with customer transactions or impeding the manufacturing and
shipping of the Company's products. These events could materially adversely affect the Company's business, reputation, results
of operations and financial condition.
The Company's business and reputation are impacted by information technology system failures and network
disruptions.
The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected
resellers' stores with Company employees and contractors, and improving product placement displays. These programs can
require a substantial investment while not assuring return or incremental sales. The financial condition of these resellers could
weaken, these resellers could stop distributing the Company's products, or uncertainty regarding demand for some or all of the
Company's products could cause resellers to reduce their ordering and marketing of the Company's products.
Apple Inc. | 2023 Form 10-K | 10
Some carriers providing cellular network service for the Company's products offer financing, installment payment plans or
subsidies for users' purchases of the device. There can be no assurance such offers will be continued at all or in the same
amounts.
Apple Inc. | 2023 Form 10-K | 11
The Company distributes its products and certain of its services through cellular network carriers, wholesalers, retailers and
resellers, many of which distribute products and services from competitors. The Company also sells its products and services
and resells third-party products in most of its major markets directly to consumers, small and mid-sized businesses, and
education, enterprise and government customers through its retail and online stores and its direct sales force.
The Company believes that its distinctive and inclusive culture is a significant driver of its success. If the Company is unable to
nurture its culture, it could materially adversely affect the Company's ability to recruit and retain the highly skilled employees who
are critical to its success, and could otherwise materially adversely affect the Company's business, reputation, results of
operations and financial condition.
Much of the Company's future success depends on the talents and efforts of its team members and the continued availability and
service of key personnel, including its Chief Executive Officer, executive team and other highly skilled employees. Experienced
personnel in the technology industry are in high demand and competition for their talents is intense, especially in Silicon Valley,
where most of the Company's key personnel are located. In addition to intense competition for talent, workforce dynamics are
constantly evolving. If the Company does not manage changing workforce dynamics effectively, it could materially adversely
affect the Company's culture, reputation and operational flexibility.
The Company's success depends largely on the talents and efforts of its team members, the continued service and
availability of highly skilled employees, including key personnel, and the Company's ability to nurture its distinctive and
inclusive culture.
Some third-party digital content providers require the Company to provide digital rights management and other security solutions.
If requirements change, the Company may have to develop or license new technology to provide these solutions. There can be
no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner.
The Company also produces its own digital content, which can be costly to produce due to intense and increasing competition for
talent, content and subscribers, and may fail to appeal to the Company's customers.
The Company contracts with numerous third parties to offer their digital content to customers. This includes the right to sell, or
offer subscriptions to, third-party content, as well as the right to incorporate specific content into the Company's own services.
The licensing or other distribution arrangements for this content can be for relatively short time periods and do not guarantee the
continuation or renewal of these arrangements on commercially reasonable terms, or at all. Some third-party content providers
and distributors currently or in the future may offer competing products and services, and can take actions to make it difficult or
impossible for the Company to license or otherwise distribute their content. Other content owners, providers or distributors may
seek to limit the Company's access to, or increase the cost of, such content. The Company may be unable to continue to offer a
wide variety of content at commercially reasonable prices with acceptable usage rules.
Failure to obtain or create digital content that appeals to the Company's customers, or to make such content available
on commercially reasonable terms, could have a material adverse impact on the Company's business, results of
operations and financial condition.
The Company distributes third-party applications for its products through the App Store. For the vast majority of applications,
developers keep all of the revenue they generate on the App Store. The Company retains a commission from sales of
applications and sales of digital services or goods initiated within an application. From time to time, the Company has made
changes to its App Store, including actions taken in response to competition, market conditions and legal and regulatory
requirements. The Company expects to make further business changes in the future, including as a result of legislative initiatives
impacting the App Store, such as the European Union ("EU") Digital Markets Act, which the Company is required to comply with
by March 2024. The Company is also subject to litigation and investigations relating to the App Store, which have resulted in
changes to the Company's business practices, and may in the future result in further changes. Changes have included how
developers communicate with consumers outside the App Store regarding alternative purchasing mechanisms. Future changes
could also affect what the Company charges developers for access to its platforms, how it manages distribution of apps outside
of the App Store, and how and to what extent it allows developers to communicate with consumers inside the App Store
regarding alternative purchasing mechanisms. This could reduce the volume of sales, and the commission that the Company
earns on those sales, would decrease. If the rate of the commission that the Company retains on such sales is reduced, or if it is
otherwise narrowed in scope or eliminated, the Company's business, results of operations and financial condition could be
materially adversely affected.
Apple Inc. | 2023 Form 10-K | 9
The Company relies on the continued availability and development of compelling and innovative software applications for its
products. The Company's products and operating systems are subject to rapid technological change, and when third-party
developers are unable to or choose not to keep up with this pace of change, their applications can fail to take advantage of these
changes to deliver improved customer experiences, can operate incorrectly, and can result in dissatisfied customers and lower
customer demand for the Company's products.
The Company's minority market share in the global smartphone, personal computer and tablet markets can make developers
less inclined to develop or upgrade software for the Company's products and more inclined to devote their resources to
developing and upgrading software for competitors' products with larger market share. When developers focus their efforts on
these competing platforms, the availability and quality of applications for the Company's devices can suffer.
The Company depends on the performance of carriers, wholesalers, retailers and other resellers.
Properties
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts
sufficient to require submission of the schedule, or because the information required is included in the consolidated financial
statements and accompanying notes.
PART II
$300
$400
The following graph shows a comparison of five-year cumulative total shareholder return, calculated on a dividend-reinvested
basis, for the Company, the S&P 500 Index and the Dow Jones U.S. Technology Supersector Index. The graph assumes $100
was invested in each of the Company's common stock, the S&P 500 Index and the Dow Jones U.S. Technology Supersector
Index as of the market close on September 28, 2018. Past stock price performance is not necessarily indicative of future stock
price performance.
Company Stock Performance
74,069
Apple Inc. | 2023 Form 10-K | 18
(2) In August 2023, the Company entered into new accelerated share repurchase agreements ("ASRS"). Under the terms of the
ASRs, two financial institutions committed to deliver shares of the Company's common stock during the purchase periods in
exchange for up-front payments totaling $5.0 billion. The total number of shares ultimately delivered under the ASRs, and
therefore the average repurchase price paid per share, is determined based on the volume-weighted average price of the
Company's common stock during the ASRS' purchase periods, which end in the first quarter of 2024.
(1) As of September 30, 2023, the Company was authorized by the Board of Directors to purchase up to $90 billion of the
Company's common stock under a share repurchase program announced on May 4, 2023, of which $15.9 billion had been
utilized. During the fourth quarter of 2023, the Company also utilized the final $4.6 billion under its previous repurchase
program, which was most recently authorized in April 2022. The programs do not obligate the Company to acquire a
minimum amount of shares. Under the programs, shares may be repurchased in privately negotiated or open market
transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
$
20,347
176.31
20,347
106,595
22,085 (2)
30,299
$ 178.99
(2)
22,085 (2)
30,299
33,864
$ 191.62
33,864
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
(1)
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
$200
$100
$0
9/28/18
$
September
2023
September
2022
September
2021
2020
September
September
2019
September
2018
9/30/23
Item 6. [Reserved]
Total Number
Dow Jones U.S. Technology Supersector Index
Apple Inc.
Dow Jones U.S. Technology Supersector Index
S&P 500 Index - - - Dow Jones &
Apple Inc.
9/24/22
9/25/21
9/26/20
9/28/19
Among Apple Inc., the S&P 500 Index and the Dow Jones U.S. Technology Supersector Index
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
S&P 500 Index
Paid Per
Share
Average
Price
Total Number
of Shares
Purchased
Rest of Asia Pacific net sales increased 1% or $240 million during 2023 compared to 2022. The weakness in foreign currencies
relative to the U.S. dollar had a significantly unfavorable year-over-year impact on Rest of Asia Pacific net sales. The net sales
increase consisted of higher net sales of iPhone and Services, partially offset by lower net sales of Mac and iPad.
Apple Inc. | 2023 Form 10-K | 21
Products and Services Performance
The following table shows net sales by category for 2023, 2022 and 2021 (dollars in millions):
2023
Change
2022
Change
2021
Net sales by category:
Rest of Asia Pacific
iPhone (1)
200,583
(2)% $
205,489
7% $
191,973
Mac
(1)
29,357
(27)%
40,177
$
100 $
Japan net sales decreased 7% or $1.7 billion during 2023 compared to 2022. The weakness in the yen relative to the U.S. dollar
accounted for more than the entire year-over-year decrease in Japan net sales, which consisted primarily of lower net sales of
iPhone, Wearables, Home and Accessories and Mac.
Greater China net sales decreased 2% or $1.6 billion during 2023 compared to 2022. The weakness in the renminbi relative to
the U.S. dollar accounted for more than the entire year-over-year decrease in Greater China net sales, which consisted primarily
of lower net sales of Mac and iPhone.
Open market and privately negotiated purchases
Total
September 3, 2023 to September 30, 2023:
Open market and privately negotiated purchases
August 2023 ASRs
August 6, 2023 to September 2, 2023:
Open market and privately negotiated purchases
July 2, 2023 to August 5, 2023:
Periods
Share repurchase activity during the three months ended September 30, 2023 was as follows (in millions, except number of
shares, which are reflected in thousands, and per-share amounts):
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Japan
As of October 20, 2023, there were 23,763 shareholders of record.
The Company's common stock is traded on The Nasdaq Stock Market LLC under the symbol AAPL.
383,285
(3)% $
394,328
8% $
365,817
Americas net sales decreased 4% or $7.1 billion during 2023 compared to 2022 due to lower net sales of iPhone and Mac,
partially offset by higher net sales of Services.
Europe
Europe net sales decreased 1% or $824 million during 2023 compared to 2022. The weakness in foreign currencies relative to
the U.S. dollar accounted for more than the entire year-over-year decrease in Europe net sales, which consisted primarily of
lower net sales of Mac and Wearables, Home and Accessories, partially offset by higher net sales of iPhone and Services.
Greater China
Holders
14 %
98
204 $
162,560
$
2021
Change
2022
Change
2023
Americas
Total net sales
Rest of Asia Pacific
Japan
Greater China
Europe
Americas
Net sales by reportable segment:
The following table shows net sales by reportable segment for 2023, 2022 and 2021 (dollars in millions):
Segment Operating Performance
Apple Inc. | 2023 Form 10-K | 20
Macroeconomic conditions, including inflation, changes in interest rates, and currency fluctuations, have directly and indirectly
impacted, and could in the future materially impact, the Company's results of operations and financial condition.
Macroeconomic Conditions
In May 2023, the Company announced a new share repurchase program of up to $90 billion and raised its quarterly dividend
from $0.23 to $0.24 per share beginning in May 2023. During 2023, the Company repurchased $76.6 billion of its common stock
and paid dividends and dividend equivalents of $15.0 billion.
(4)% $
169,658
11 % $
153,306
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
$
26,356
11 %
29,375
1 %
29,615
28,482
(9)%
25,977
Apple Watch Series 9 and Apple Watch Ultra 2.
(7)%
68,366
9%
74,200
(2)%
72,559
89,307
7%
95,118
(1)%
94,294
24,257
•
iPhone 15, iPhone 15 Plus, iPhone 15 Pro and iPhone 15 Pro Max; and
Fourth Quarter 2023:
226
$
160
69 69
164
227 $
$
154
$
105
Apple Inc. | 2023 Form 10-K | 19
136 $
161
118 $
104 $
100 $
100
EA
317
$
277
$
269
$
$
Item 7.
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes
included in Part II, Item 8 of this Form 10-K. This Item generally discusses 2023 and 2022 items and year-to-year comparisons
between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included,
and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item
7 of the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 2022.
iOS 17, macOS Sonoma, iPadOS 17, tvOS 17 and watchOS 10, updates to the Company's operating systems.
Apple Vision Pro™, the Company's first spatial computer featuring its new visionOS™, expected to be available in early
calendar year 2024; and
MacBook Air 15", Mac Studio and Mac Pro;
•
•
Third Quarter 2023:
Second-generation HomePod.
MacBook Pro 14", MacBook Pro 16" and Mac mini; and
•
Second Quarter 2023:
Management's Discussion and Analysis of Financial Condition and Results of Operations
MLS Season Pass, a Major League Soccer subscription streaming service.
•
iPad and iPad Pro;
•
First Quarter 2023:
The Company announces new product, service and software offerings at various times during the year. Significant
announcements during fiscal year 2023 included the following:
The Company's total net sales decreased 3% or $11.0 billion during 2023 compared to 2022. The weakness in foreign
currencies relative to the U.S. dollar accounted for more than the entire year-over-year decrease in total net sales, which
consisted primarily of lower net sales of Mac and iPhone, partially offset by higher net sales of Services.
The Company's total net sales were $383.3 billion and net income was $97.0 billion during 2023.
Fiscal Year Highlights
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 every five or six years to realign the Company's fiscal quarters with calendar quarters, which
occurred in the first quarter of 2023. The Company's fiscal year 2023 spanned 53 weeks, whereas fiscal years 2022 and 2021
spanned 52 weeks each.
Fiscal Period
Next-generation Apple TV 4K; and
35,190
•
28,300
14.7%
16.2%
14,527
13.3%
21%
21%
21%
The Company's effective tax rate for 2023 and 2022 was lower than the statutory federal income tax rate due primarily to a lower
effective tax rate on foreign earnings, the impact of the U.S. federal R&D credit, and tax benefits from share-based
compensation, partially offset by state income taxes.
The Company's effective tax rate for 2023 was lower compared to 2022 due primarily to a lower effective tax rate on foreign
earnings and the impact of U.S. foreign tax credit regulations issued by the U.S. Department of the Treasury in 2022, partially
offset by lower tax benefits from share-based compensation.
Liquidity and Capital Resources
The Company believes its balances of cash, cash equivalents and unrestricted marketable securities, which totaled $148.3 billion
as of September 30, 2023, along with cash generated by ongoing operations and continued access to debt markets, will be
sufficient to satisfy its cash requirements and capital return program over the next 12 months and beyond.
The Company's material cash requirements include the following contractual obligations:
Debt
As of September 30, 2023, the Company had outstanding fixed-rate notes with varying maturities for an aggregate principal
amount of $106.6 billion (collectively the "Notes"), with $9.9 billion payable within 12 months. Future interest payments
associated with the Notes total $41.1 billion, with $2.9 billion payable within 12 months.
The Company also issues unsecured short-term promissory notes pursuant to a commercial paper program. As of
September 30, 2023, the Company had $6.0 billion of commercial paper outstanding, all of which was payable within 12 months.
Leases
The Company has lease arrangements for certain equipment and facilities, including corporate, data center, manufacturing and
retail space. As of September 30, 2023, the Company had fixed lease payment obligations of $15.8 billion, with $2.0 billion
payable within 12 months.
Manufacturing Purchase Obligations
The Company utilizes several outsourcing partners to manufacture subassemblies for the Company's products and to perform
final assembly and testing of finished products. The Company also obtains individual components for its products from a wide
variety of individual suppliers. As of September 30, 2023, the Company had manufacturing purchase obligations of $53.1 billion,
with $52.9 billion payable within 12 months. The Company's manufacturing purchase obligations are primarily noncancelable.
Other Purchase Obligations
The Company's other purchase obligations primarily consist of noncancelable obligations to acquire capital assets, including
assets related to product manufacturing, and noncancelable obligations related to supplier arrangements, licensed intellectual
property and content, and distribution rights. As of September 30, 2023, the Company had other purchase obligations of $21.9
billion, with $5.6 billion payable within 12 months.
Deemed Repatriation Tax Payable
$
19,300
$
16,741
54,847
7% $
Percentage of total net sales
14%
51,345
13%
17 % $
43,887
12%
Research and Development
The year-over-year growth in R&D expense in 2023 was driven primarily by increases in headcount-related expenses.
As of September 30, 2023, the balance of the deemed repatriation tax payable imposed by the U.S. Tax Cuts and Jobs Act of
2017 (the "Act") was $22.0 billion, with $6.5 billion expected to be paid within 12 months.
Selling, General and Administrative
Apple Inc. | 2023 Form 10-K | 23
Provision for Income Taxes
Provision for income taxes, effective tax rate and statutory federal income tax rate for 2023, 2022 and 2021 were as follows
(dollars in millions):
Provision for income taxes
Effective tax rate
Statutory federal income tax rate
2023
2022
2021
$
Selling, general and administrative expense was relatively flat in 2023 compared to 2022.
Apple Inc. | 2023 Form 10-K | 24
Capital Return Program
In addition to its contractual cash requirements, the Company has an authorized share repurchase program. The program does
not obligate the Company to acquire a minimum amount of shares. As of September 30, 2023, the Company's quarterly cash
dividend was $0.24 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the
Board of Directors.
The Company's exposure to foreign exchange rate risk relates primarily to the Company being a net receiver of currencies other
than the U.S. dollar. Changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the
Company's net sales and gross margins as expressed in U.S. dollars. Fluctuations in exchange rates may also affect the fair
values of certain of the Company's assets and liabilities. To protect against foreign exchange rate risk, the Company may use
derivative instruments, offset exposures, or adjust local currency pricing of its products and services. However, the Company
may choose to not hedge certain foreign currency exposures for a variety of reasons, including accounting considerations or
prohibitive cost.
The Company applied a value-at-risk ("VAR”) model to its foreign currency derivative positions to assess the potential impact of
fluctuations in exchange rates. The VAR model used a Monte Carlo simulation. The VAR is the maximum expected loss in fair
value, for a given confidence interval, to the Company's foreign currency derivative positions due to adverse movements in rates.
Based on the results of the model, the Company estimates, with 95% confidence, a maximum one-day loss in fair value of $669
million and $1.0 billion as of September 30, 2023 and September 24, 2022, respectively. Changes in the Company's underlying
foreign currency exposures, which were excluded from the assessment, generally offset changes in the fair values of the
Company's foreign currency derivatives.
Apple Inc. | 2023 Form 10-K | 26
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Consolidated Statements of Operations for the years ended September 30, 2023, September 24, 2022 and
September 25, 2021
28
Consolidated Statements of Comprehensive Income for the years ended September 30, 2023, September 24,
2022 and September 25, 2021
29
Foreign Exchange Rate Risk
Consolidated Balance Sheets as of September 30, 2023 and September 24, 2022
30
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2023, September 24, 2022
and September 25, 2021
Consolidated Statements of Cash Flows for the years ended September 30, 2023, September 24, 2022 and
September 25, 2021
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
31
32
33
iPad (1)
49
25
$
201
3,089 $
194 $
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles
("GAAP") and the Company's discussion and analysis of its financial condition and operating results require the Company's
management to make judgments, assumptions and estimates that affect the amounts reported. Note 1, "Summary of Significant
Accounting Policies" of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the
significant accounting policies and methods used in the preparation of the Company's consolidated financial statements.
Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Uncertain Tax Positions
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. The evaluation of the Company's
uncertain tax positions involves significant judgment in the interpretation and application of GAAP and complex domestic and
international tax laws, including the Act and matters related to the allocation of international taxation rights between countries.
Although management believes the Company's reserves are reasonable, no assurance can be given that the final outcome of
these uncertainties will not be different from that which is reflected in the Company's reserves. Reserves are adjusted
considering changing facts and circumstances, such as the closing of a tax examination. Resolution of these uncertainties in a
manner inconsistent with management's expectations could have a material impact on the Company's financial condition and
operating results.
Legal and Other Contingencies
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, the outcomes of
which are inherently uncertain. The Company records a liability when it is probable that a loss has been incurred and the amount
is reasonably estimable, the determination of which requires significant judgment. Resolution of legal matters in a manner
inconsistent with management's expectations could have a material impact on the Company's financial condition and operating
results.
Apple Inc. | 2023 Form 10-K | 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to economic risk from interest rates and foreign exchange rates. The Company uses various strategies
to manage these risks; however, they may still impact the Company's consolidated financial statements.
Interest Rate Risk
4,022
The Company is primarily exposed to fluctuations in U.S. interest rates and their impact on the Company's investment portfolio
and term debt. Increases in interest rates will negatively affect the fair value of the Company's investment portfolio and increase
the interest expense on the Company's term debt. To protect against interest rate risk, the Company may use derivative
instruments, offset interest rate-sensitive assets and liabilities, or control duration of the investment and term debt portfolios.
Interest Rate
Sensitive Instrument
Investment portfolio
Term debt
Hypothetical Interest
Rate Increase
100 basis points, all tenors
100 basis points, all tenors
Potential Impact
Decline in fair value
2023
2022
$
Increase in annual interest expense
The following table sets forth potential impacts on the Company's investment portfolio and term debt, including the effects of any
associated derivatives, that would result from a hypothetical increase in relevant interest rates as of September 30, 2023 and
September 24, 2022 (dollars in millions):
Total operating expenses
$
6%
iPhone net sales decreased 2% or $4.9 billion during 2023 compared to 2022 due to lower net sales of non-Pro iPhone models,
partially offset by higher net sales of Pro iPhone models.
Mac
Mac net sales decreased 27% or $10.8 billion during 2023 compared to 2022 due primarily to lower net sales of laptops.
iPad
iPad net sales decreased 3% or $1.0 billion during 2023 compared to 2022 due primarily to lower net sales of iPad mini and iPad
Air, partially offset by the combined net sales of iPad 9th and 10th generation.
Wearables, Home and Accessories
Wearables, Home and Accessories net sales decreased 3% or $1.4 billion during 2023 compared to 2022 due primarily to lower
net sales of Wearables and Accessories.
Services
Services net sales increased 9% or $7.1 billion during 2023 compared to 2022 due to higher net sales across all lines of
business.
Apple Inc. | 2023 Form 10-K | 22
iPhone
Gross Margin
Gross margin:
Products
Services
Total gross margin
Gross margin percentage:
Products
Services
Total gross margin percentage
2023
2022
Products and Services gross margin and gross margin percentage for 2023, 2022 and 2021 were as follows (dollars in millions):
2021
(2) Services net sales include amortization of the deferred value of services bundled in the sales price of certain products.
365,817
(3)%
29,292
6%
(8)%
31,862
Wearables, Home and Accessories (1)
39,845
(3)%
41,241
7%
(1) Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in
the sales price of the respective product.
38,367
85,200
9%
78,129
68,425
Total net sales
$
383,285
(3)% $
394,328
8% $
Services (2)
$
14%
108,803 $
2023
Change
Research and development
$
29,915
14% $
2022
26,251
Change
20% $
2021
21,914
Percentage of total net sales
Operating expenses for 2023, 2022 and 2021 were as follows (dollars in millions):
8%
6%
$
24,932
(1)% $
Apple Inc. | 2023 Form 10-K | 27
25,094
14 % $
7%
Percentage of total net sales
21,973
7%
Operating Expenses
Selling, general and administrative
169,148 $
The Company's future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of this Form 10-K
under the heading "Risk Factors." As a result, the Company believes, in general, gross margins will be subject to volatility and
downward pressure.
60,345
114,728 $
56,054
170,782 $
105,126
47,710
$
36.5%
36.3%
35.3%
70.8%
71.7%
152,836
44.1%
43.3%
41.8%
Products Gross Margin
Products gross margin decreased during 2023 compared to 2022 due to the weakness in foreign currencies relative to the U.S.
dollar and lower Products volume, partially offset by cost savings and a different Products mix.
Products gross margin percentage increased during 2023 compared to 2022 due to cost savings and a different Products mix,
partially offset by the weakness in foreign currencies relative to the U.S. dollar and decreased leverage.
Services Gross Margin
69.7%
Services gross margin increased during 2023 compared to 2022 due primarily to higher Services net sales, partially offset by the
weakness in foreign currencies relative to the U.S. dollar and higher Services costs.
Services gross margin percentage decreased during 2023 compared to 2022 due to higher Services costs and the weakness in
foreign currencies relative to the U.S. dollar, partially offset by a different Services mix.
$ 28,359 $
$
$
28,359 $ 28,359 $
$
Money market funds
442
Mutual funds and equity securities
12
Subtotal
923
12
NN I
481 - -
Securities
5.61
Current
Marketable
Securities
Approximately 24 million restricted stock units ("RSUS”) were excluded from the computation of diluted earnings per share for
2023 because their effect would have been antidilutive.
481
Apple Inc. | 2023 Form 10-K | 35
Note 4
-
Financial Instruments
Cash, Cash Equivalents and Marketable Securities
Non-Current
Marketable
The following tables show the Company's cash, cash equivalents and marketable securities by significant investment category
as of September 30, 2023 and September 24, 2022 (in millions):
2023
Cash and
Adjusted
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Cash
Equivalents
Level 1:
481
18,114
428
1,034
35
5,468
12,611
(600)
5,136
36
(1,292)
271
(1,048)
16,491
-
11,332
5,159
$
1,354
4,829
(26)
|| 0 || 6
Corporate debt securities
428
(26)
909
481
428
Level 2 (1):
U.S. Treasury securities
76,840
19,406
5,736
Non-U.S. government securities
17,533
Certificates of deposit and time deposits
1,354
Commercial paper
608
U.S. agency securities
6.11
29,357
6.15 $
2021
iPhone (1)
$
200,583 $
205,489
$
191,973
Mac (1)
40,177
35,190
iPad (1)
28,300
29,292
31,862
Wearables, Home and Accessories (1)
2022
2023
Net sales disaggregated by significant products and services for 2023, 2022 and 2021 were as follows (in millions):
Apple Inc. | 2023 Form 10-K | 34
Depreciation on property, plant and equipment is recognized on a straight-line basis.
320
Derivative Instruments
The Company presents derivative assets and liabilities at their gross fair values in the Consolidated Balance Sheets.
Income Taxes
The Company records certain deferred tax assets and liabilities in connection with the minimum tax on certain foreign earnings
created by the Act.
Leases
39,845
The Company combines and accounts for lease and nonlease components as a single lease component for leases of corporate,
data center and retail facilities.
Note 2 - Revenue
The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is
transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the
significant risks and rewards of ownership of products or services are transferred to its customers. For most of the Company's
Products net sales, control transfers when products are shipped. For the Company's Services net sales, control transfers over
time as services are delivered. Payment for Products and Services net sales is collected within a short period following transfer
of control or commencement of delivery of services, as applicable.
The Company records reductions to Products net sales related to future product returns, price protection and other customer
incentive programs based on the Company's expectations and historical experience.
For arrangements with multiple performance obligations, which represent promises within an arrangement that are distinct, the
Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices ("SSPS").
When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are
established that reflect the Company's best estimates of what the selling prices of the performance obligations would be if they
were sold regularly on a stand-alone basis. The Company's process for estimating SSPs without observable prices considers
multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation
including, where applicable, prices charged by the Company for similar offerings, market trends in the pricing for similar offerings,
product-specific business objectives and the estimated cost to provide the performance obligation.
The Company has identified up to three performance obligations regularly included in arrangements involving the sale of iPhone,
Mac, iPad and certain other products. The first performance obligation, which represents the substantial portion of the allocated
sales price, is the hardware and bundled software delivered at the time of sale. The second performance obligation is the right to
receive certain product-related bundled services, which include iCloud®, SiriⓇ and Maps. The third performance obligation is the
right to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the software bundled with
each device. The Company allocates revenue and any related discounts to these performance obligations based on their relative
SSPs. Because the Company lacks observable prices for the undelivered performance obligations, the allocation of revenue is
based on the Company's estimated SSPs. Revenue allocated to the delivered hardware and bundled software is recognized
when control has transferred to the customer, which generally occurs when the product is shipped. Revenue allocated to the
product-related bundled services and unspecified software upgrade rights is deferred and recognized on a straight-line basis
over the estimated period they are expected to be provided.
For certain long-term service arrangements, the Company has performance obligations for services it has not yet delivered. For
these arrangements, the Company does not have a right to bill for the undelivered services. The Company has determined that
any unbilled consideration relates entirely to the value of the undelivered services. Accordingly, the Company has not recognized
revenue, and does not disclose amounts, related to these undelivered services.
For the sale of third-party products where the Company obtains control of the product before transferring it to the customer, the
Company recognizes revenue based on the gross amount billed to customers. The Company considers multiple factors when
determining whether it obtains control of third-party products, including evaluating if it can establish the price of the product,
retains inventory risk for tangible products or has the responsibility for ensuring acceptability of the product. For third-party
applications sold through the App Store, the Company does not obtain control of the product before transferring it to the
customer. Therefore, the Company accounts for all third-party application-related sales on a net basis by recognizing in Services
net sales only the commission it retains.
Apple Inc. | 2023 Form 10-K | 33
5.67
41,241
Services (2)
Weighted-average diluted shares
Basic earnings per share
2023
2022
2021
$
96,995 $
99,803 $
94,680
15,744,231
68,316
15,812,547
16,215,963
109,856
16,325,819
16,701,272
163,647
16,864,919
Diluted earnings per share
6.16 $
6.13 $
Effect of dilutive share-based awards
Weighted-average basic shares outstanding
Denominator:
Net income
85,200
78,129
68,425
Total net sales
$
383,285 $
394,328 $
38,367
365,817
(2) Services net sales include amortization of the deferred value of services bundled in the sales price of certain products.
Total net sales include $8.2 billion of revenue recognized in 2023 that was included in deferred revenue as of September 24,
2022, $7.5 billion of revenue recognized in 2022 that was included in deferred revenue as of September 25, 2021, and $6.7
billion of revenue recognized in 2021 that was included in deferred revenue as of September 26, 2020.
The Company's proportion of net sales by disaggregated revenue source was generally consistent for each reportable segment
in Note 13, "Segment Information and Geographic Data" for 2023, 2022 and 2021, except in Greater China, where iPhone
revenue represented a moderately higher proportion of net sales.
As of September 30, 2023 and September 24, 2022, the Company had total deferred revenue of $12.1 billion and $12.4 billion,
respectively. As of September 30, 2023, the Company expects 67% of total deferred revenue to be realized in less than a year,
25% within one-to-two years, 7% within two-to-three years and 1% in greater than three years.
Note 3 - Earnings Per Share
The following table shows the computation of basic and diluted earnings per share for 2023, 2022 and 2021 (net income in
millions and shares in thousands):
Numerator:
(1) Products net sales include amortization of the deferred value of unspecified software upgrade rights, which are bundled in
the sales price of the respective product.
608
9,023
266
Municipal securities
70,427
620
19,960
147,407
53
19,907
2,171
24,431
120,805
Total (2)
$ 183,061 $
11 $
120,805
(13,963) $ 169,109 $ 23,646 $ 24,658 $
(1) The valuation techniques used to measure the fair values of the Company's Level 2 financial instruments, which generally
have counterparties with high credit ratings, are based on quoted market prices or model-driven valuations using significant
inputs derived from or corroborated by observable market data.
(2) As of September 30, 2023 and September 24, 2022, total marketable securities included $13.8 billion and $12.7 billion,
respectively, that were restricted from general use, related to the State Aid Decision (refer to Note 7, "Income Taxes") and
other agreements.
886
690
28
718
79,450
Certificates of deposit and time deposits
2,067
2,067
1,805
262
Commercial paper
718
Apple Inc. | 2023 Form 10-K | 36
Corporate debt securities
Municipal securities
921
Mortgage- and asset-backed securities
Subtotal
22,553
161,312
11
(7,707)
(35)
(2,593)
(13,916)
87,148
6,943
The following table shows the fair value of the Company's non-current marketable debt securities, by contractual maturity, as of
September 30, 2023 (in millions):
Due after 5 years through 10 years
Due after 10 years
2023
2022
$
74,730
102,670
19,375 $
20,125
Derivative instruments not designated as accounting hedges:
Foreign exchange contracts
$
EA
Apple Inc. | 2023 Form 10-K | 37
104,777
185,381
Property, Plant and Equipment
Interest rate contracts
Derivative instruments designated as accounting hedges:
Foreign exchange contracts
The notional amounts of the Company's outstanding derivative instruments as of September 30, 2023 and September 24, 2022
were as follows (in millions):
To protect the Company's term debt or marketable securities from fluctuations in interest rates, the Company may use interest
rate swaps, options or other instruments. The Company designates these instruments as either cash flow or fair value hedges.
Total fair value
$
74,427
9,964
16,153
$
100,544
Due after 1 year through 5 years
The Company's investments in marketable debt securities have been classified and accounted for as available-for-sale. The
Company classifies marketable debt securities as either current or non-current based solely on each instrument's underlying
contractual maturity date.
The Company may use derivative instruments to partially offset its business exposure to foreign exchange and interest rate risk.
However, the Company may choose not to hedge certain exposures for a variety of reasons including accounting considerations
or 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 exchange or interest rates.
The Company classifies cash flows related to derivative instruments in the same section of the Consolidated Statements of Cash
Flows as the items being hedged, which are generally classified as operating activities.
Foreign Exchange Rate Risk
To protect gross margins from fluctuations in foreign exchange rates, the Company may use forwards, options or other
instruments, and may designate these instruments as cash flow hedges. The Company generally hedges portions of its
forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To protect the Company's foreign currency-denominated term debt or marketable securities from fluctuations in foreign
exchange rates, the Company may use forwards, cross-currency swaps or other instruments. The Company designates these
instruments as either cash flow or fair value hedges. As of September 30, 2023, the maximum length of time over which the
Company is hedging its exposure to the variability in future cash flows for term debt-related foreign currency transactions is 19
years.
The Company may also use derivative instruments that are not designated as accounting hedges to protect gross margins from
certain fluctuations in foreign exchange rates, as well as to offset a portion of the foreign currency gains and losses generated by
the remeasurement of certain assets and liabilities denominated in non-functional currencies.
Interest Rate Risk
Derivative Instruments and Hedging
8,806
15,749
(1,201)
1,125
31,162
100,544
Total (2)
$ 173,752
$
30
$ (11,683) $ 162,099
$
29,965 $ 31,590 $ 100,544
2022
Cash and
Adjusted
Cost
Unrealized
Gains
Unrealized
Losses
(11,657) 132,831
18
144,470
Subtotal
628
(5,956)
(26)
70,890
20
12,627
58,243
602
Fair
Value
192
Mortgage- and asset-backed securities
22,365
6
(2,735)
19,636
344
19,292
410
Cash
Equivalents
Current Non-Current
Marketable Marketable
Securities Securities
$ 18,546 $
U.S. Treasury securities
25,134
(1,725)
23,409
338
5,091
17,980
227
227
U.S. agency securities
(655)
5,168
240
4,928
Non-U.S. government securities
16,948
2
5,823
608
2,929
(47)
$
$ 18,546
$ 18,546 $
Cash
Level 1:
Money market funds
Mutual funds
3,156
Subtotal
2,929
274
3,203
2,929
2,929
(47)
227
Level 2 (1):
Inventories are measured using the first-in, first-out method.
Cash
The cost of securities sold is determined using the specific identification method.
Total cost of sales
Services
Products
Cost of sales:
Total net sales
Services
(In millions, except number of shares, which are reflected in thousands, and per-share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
Apple Inc.
Products
Net sales:
Current liabilities:
Accounts payable
Other current liabilities
Deferred revenue
Commercial paper
Term debt
Total current liabilities
Non-current liabilities:
Term debt
Total non-current liabilities
Total liabilities
Commitments and contingencies
ASSETS:
LIABILITIES AND SHAREHOLDERS' EQUITY:
Years ended
Shareholders' equity:
September 30,
2023
September 25,
2021
29,915
Research and development
Operating expenses:
Gross margin
152,836
170,782
169,148
212,981
223,546
214,137
20,715
22,075
24,855
192,266
201,471
189,282
365,817
394,328
383,285
68,425
78,129
85,200
297,392
316,199 $
298,085 $
September 24,
2022
Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares
authorized; 15,550,061 and 15,943,425 shares issued and outstanding, respectively
Accumulated deficit
Accumulated other comprehensive loss
Total shareholders' equity
62,611
64,115
58,829
60,845
8,061
7,912
5,985
9,982
9,822
11,128
145,308
153,982
95,281
98,959
49,848
49,142
145,129
148,101
290,437
302,083
73,812
64,849
(214)
(11,452)
62,146
(3,068)
(11,109)
$
352,755
$
352,583
Total liabilities and shareholders' equity
September 30,
2023
September 24,
2022
29,965
23,646
31,590
24,658
29,508
28,184
31,477
32,748
6,331
26,251
4,946
21,223
143,566
135,405
100,544
120,805
43,715
42,117
64,758
54,428
209,017
217,350
$
14,695
21,914
Selling, general and administrative
24,932
(11,899)
1,816
Total change in unrealized gains/losses on marketable debt
securities
(273)
205
253
income
Adjustment for net (gains)/losses realized and included in net
(694)
(12,104)
1,563
Change in fair value of marketable debt securities
1,035
2,138
(1,394)
1,003
(1,074)
(1,717)
32
3,212
323
501
(1,511)
(765)
94,680
Inventories
(967)
Total other comprehensive income/(loss)
(343)
Total assets
Total non-current assets
Other non-current assets
Property, plant and equipment, net
Marketable securities
Non-current assets:
Total current assets
Other current assets
Inventories
Vendor non-trade receivables
Accounts receivable, net
Marketable securities
99,803 $
Cash and cash equivalents
(In millions, except number of shares, which are reflected in thousands, and par value)
CONSOLIDATED BALANCE SHEETS
Apple Inc.
Apple Inc. | 2023 Form 10-K | 29
See accompanying Notes to Consolidated Financial Statements.
95,249
88,531 $
96,652 $
$
Total comprehensive income
569
(11,272)
Current assets:
50,672
96,995 $
September 25,
2021
96,995 $
$
Net income
14,527
19,300
16,741
Provision for income taxes
109,207
119,103
113,736
Income before provision for income taxes
258
(334)
(565)
Other income/(expense), net
108,949
119,437
114,301
Operating income
43,887
51,345
54,847
Total operating expenses
21,973
25,094
99,803 $
94,680
Earnings per share:
Basic
Diluted
September 24,
2022
September 30,
2023
Years ended
Change in unrealized gains/losses on marketable debt securities, net of
tax:
Total change in unrealized gains/losses on derivative
instruments
Adjustment for net (gains)/losses realized and included in net
income
Change in unrealized gains/losses on derivative instruments, net of tax:
Change in fair value of derivative instruments
(In millions)
Change in foreign currency translation, net of tax
Other comprehensive income/(loss):
Net income
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
$
Apple Inc.
See accompanying Notes to Consolidated Financial Statements.
16,864,919
16,701,272
16,215,963
16,325,819
15,744,231
15,812,547
5.61
5.67
6.15 $
6.11 $
6.16 $
6.13 $
Diluted
Basic
Shares used in computing earnings per share:
Apple Inc. | 2023 Form 10-K | 28
$
Other non-current liabilities
$
Investing activities:
Purchases of marketable securities
(29,513)
(76,923)
(109,558)
Proceeds from maturities of marketable securities
39,686
29,917
59,023
Proceeds from sales of marketable securities
5,828
37,446
Cash generated by operating activities
47,460
(10,959)
(10,708)
(11,085)
Other
(1,337)
(2,086)
(385)
Cash generated by/(used in) investing activities
3,705
(22,354)
(14,545)
Financing activities:
Payments for acquisition of property, plant and equipment
104,038
122,151
110,543
1,006
(4,921)
Changes in operating assets and liabilities:
Accounts receivable, net
Vendor non-trade receivables
Inventories
Other current and non-current assets
Accounts payable
Other current and non-current liabilities
(1,688)
(1,823)
(10,125)
1,271
(7,520)
(3,903)
(1,618)
1,484
(2,642)
(5,684)
(6,499)
(8,042)
(1,889)
9,448
12,326
3,031
6,110
7,475
Payments for taxes related to net share settlement of equity awards
(5,431)
352,583
(6,556)
(3,860)
$
30,737 $
24,977 $
35,929
Supplemental cash flow disclosure:
Cash paid for income taxes, net
Cash paid for interest
$
18,679 $
3,803 $
19,573 $
2,865 $
25,385
2,687
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2023 Form 10-K | 32
Apple Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of Apple Inc. and its wholly owned subsidiaries. The preparation of
these consolidated financial statements and accompanying notes in conformity with GAAP requires the use of management
estimates. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified
to conform to the current period's presentation.
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 every five or six years to realign the Company's fiscal quarters with calendar quarters, which
occurred in the first fiscal quarter of 2023. The Company's fiscal year 2023 spanned 53 weeks, whereas fiscal years 2022 and
2021 spanned 52 weeks each. Unless otherwise stated, references to particular years, quarters, months and periods refer to the
Company's fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Revenue
The Company records revenue net of taxes collected from customers that are remitted to governmental authorities.
Share-Based Compensation
The Company recognizes share-based compensation expense on a straight-line basis for its estimate of equity awards that will
ultimately vest.
Cash Equivalents
All highly liquid investments with maturities of three months or less at the date of purchase are treated as cash equivalents.
Marketable Securities
(10,952)
(2,227)
5,760
(93,353)
Payments for dividends and dividend equivalents
(15,025)
(14,841)
(14,467)
Repurchases of common stock
(77,550)
(89,402)
(85,971)
Proceeds from issuance of term debt, net
5,228
5,465
20,393
Repayments of term debt
(11,151)
(9,543)
(8,750)
Proceeds from/(Repayments of) commercial paper, net
(3,978)
3,955
1,022
Other
(581)
(160)
976
Cash used in financing activities
(108,488)
(110,749)
Increase/(Decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, ending balances
Other
(6,223)
9,038
8,108
Ending balances
64,849
57,365
Retained earnings/(Accumulated deficit):
Beginning balances
(3,068)
5,562
14,966
Net income
96,995
99,803
94,680
Dividends and dividend equivalents declared
(14,996)
(14,793)
(14,431)
Common stock withheld related to net share settlement of equity
awards
(2,099)
(3,454)
(4,151)
Common stock repurchased
(77,046)
(90,186)
(85,502)
Ending balances
(214)
9,280
(3,068)
11,138
(2,627)
7,906
352,755
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2023 Form 10-K | 30
Apple Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except per-share amounts)
Years ended
September 30,
2023
September 24,
2022
September 25,
2021
$
50,672 $
63,090 $
65,339
Total shareholders' equity, beginning balances
Common stock and additional paid-in capital:
Beginning balances
64,849
57,365
50,779
Common stock issued
1,346
1,175
1,105
Common stock withheld related to net share settlement of equity
awards
(3,521)
(2,971)
Share-based compensation
5,562
73,812
Beginning balances
0.85
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2023 Form 10-K | 31
Apple Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years ended
September 30,
2023
September 24,
2022
September 25,
2021
Cash, cash equivalents and restricted cash, beginning balances
$
24,977 $
35,929
$
39,789
Operating activities:
Net income
96,995
99,803
94,680
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization
11,519
11,104
Accumulated other comprehensive income/(loss):
Share-based compensation expense
10,833
$
EA
11,284
0.94 $
0.90
Other comprehensive income/(loss)
Ending balances
Total shareholders' equity, ending balances
(11,109)
163
(406)
(343)
(11,452)
(11,272)
(11,109)
569
163
62,146 $
Dividends and dividend equivalents declared per share or RSU
50,672
63,090
$
$
129
165
Other current liabilities
Finance leases
9,936
Lease liability maturities as of September 30, 2023, are as follows (in millions):
10,408
Other non-current liabilities
1,534
1,410 $
$
Other current liabilities
Operating leases
Other non-current liabilities
859
Total lease liabilities
2024
$
12,842 $
Total lease liabilities
12,411
Lease liabilities:
Less: Imputed interest
Total undiscounted liabilities
Thereafter
2028
2027
2026
2025
Apple Inc. | 2023 Form 10-K | 42
812
11,369
2023
$
Operating
Leases
(494)
(929)
(181)
$
19,454 $
16,758 $
15,477
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and many state and foreign
jurisdictions. Tax years after 2017 for the U.S. federal jurisdiction, and after 2014 in certain major foreign jurisdictions, remain
subject to examination. Although the timing of resolution or closure of examinations is not certain, the Company believes it is
reasonably possible that its gross unrecognized tax benefits could decrease in the next 12 months by as much as $4.5 billion.
Apple Inc. | 2023 Form 10-K | 41
European Commission State Aid Decision
On August 30, 2016, the European Commission announced its decision that Ireland granted state aid to the Company by
providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two subsidiaries of the
Company (the "State Aid Decision"). The State Aid Decision ordered Ireland to calculate and recover additional taxes from the
Company for the period June 2003 through December 2014. Irish legislative changes, effective as of January 2015, eliminated
the application of the tax opinions from that date forward. The recovery amount was calculated to be €13.1 billion, plus interest of
€1.2 billion. The Company and Ireland appealed the State Aid Decision to the General Court of the Court of Justice of the
European Union (the "General Court"). On July 15, 2020, the General Court annulled the State Aid Decision. On September 25,
2020, the European Commission appealed the General Court's decision to the European Court of Justice (the "ECJ") and a
hearing was held on May 23, 2023. A decision from the ECJ is expected in calendar year 2024. The Company believes it would
be eligible to claim a U.S. foreign tax credit for a portion of any incremental Irish corporate income taxes potentially due related to
the State Aid Decision.
On an annual basis, the Company may request approval from the Irish Minister for Finance to reduce the recovery amount for
certain taxes paid to other countries. As of September 30, 2023, the adjusted recovery amount was €12.7 billion, excluding
interest. The adjusted recovery amount plus interest is funded into escrow, where it will remain restricted from general use
pending the conclusion of all legal proceedings. Refer to the Cash, Cash Equivalents and Marketable Securities section of Note
4, "Financial Instruments" for more information.
Note 8 - Leases
11,676 $
The Company has lease arrangements for certain equipment and facilities, including corporate, data center, manufacturing and
retail space. These leases typically have original terms not exceeding 10 years and generally contain multiyear renewal options,
some of which are reasonably certain of exercise.
The Company made $1.9 billion, $1.8 billion and $1.4 billion of fixed cash payments related to operating leases in 2023, 2022
and 2021, respectively. Noncash activities involving right-of-use ("ROU") assets obtained in exchange for lease liabilities were
$2.1 billion, $2.8 billion and $3.3 billion for 2023, 2022 and 2021, respectively.
The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of
September 30, 2023 and September 24, 2022 (in millions):
Lease-Related Assets and Liabilities
Right-of-use assets:
Operating leases
Finance leases
Total right-of-use assets
Financial Statement Line Items
2022
Other non-current assets
$
Property, plant and equipment, net
10,661 $
1,015
10,417
952
Payments under the Company's lease arrangements may be fixed or variable, and variable lease payments are primarily based
on purchases of output of the underlying leased assets. Lease costs associated with fixed payments on the Company's operating
leases were $2.0 billion, $1.9 billion and $1.7 billion for 2023, 2022 and 2021, respectively. Lease costs associated with variable
payments on the Company's leases were $13.9 billion, $14.9 billion and $12.9 billion for 2023, 2022 and 2021, respectively.
Finance
(1,309)
Total
2022
2021
Maturities 90 days or less:
Proceeds from/(Repayments of) commercial paper, net
$
(1,333) $
5,264 $
(357)
Maturities greater than 90 days:
Proceeds from commercial paper
5,948
7,946
Repayments of commercial paper
(2,645)
2023
(7,257)
Proceeds from/(Repayments of) commercial paper, net
(2,645)
1,379
(1,838)
The gross fair values of the Company's derivative assets and liabilities as of September 24, 2022 were as follows (in millions):
2022
Derivative assets (1):
Foreign exchange contracts
Derivative liabilities (2):
Foreign exchange contracts
Interest rate contracts
EA
Fair Value of
Derivatives Designated
as Accounting Hedges
(6,567)
The Company issues unsecured short-term promissory notes 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
September 30, 2023 and September 24, 2022, the Company had $6.0 billion and $10.0 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 5.28% and 2.31% as of September 30, 2023 and September 24, 2022, respectively. The following table provides a
summary of cash flows associated with the issuance and maturities of commercial paper for 2023, 2022 and 2021 (in millions):
Commercial Paper
Note 9 - - Debt
$
1,719 $
196 $
1,915
1,875
151
2,026
1,732
120
1,852
1,351
52
1,403
1,181
34
1,215
5,983
As of September 30, 2023, the Company had $544 million of future payments under additional leases, primarily for corporate
facilities and retail space, that had not yet commenced. These leases will commence between 2024 and 2026, with lease terms
ranging from 1 year to 21 years.
The weighted-average remaining lease term related to the Company's lease liabilities as of September 30, 2023 and
September 24, 2022 was 10.6 years and 10.1 years, respectively. The discount rate related to the Company's lease liabilities as
of September 30, 2023 and September 24, 2022 was 3.0% and 2.3%, respectively. The discount rates related to the Company's
lease liabilities are generally based on estimates of the Company's incremental borrowing rate, as the discount rates implicit in
the Company's leases cannot be readily determined.
12,842
1,024 $
11,818 $
$
Leases
(2,424)
(2,023)
15,266
1,425
13,841
6,855
872
(401)
(28)
2021
1,607
$
15,457 $
34,391
16,657
32,485
$
49,848 $
2022
49,142
Interest and dividend income
Interest expense
Other income/(expense), net
Total other income/(expense), net
2023
2022
The following table shows the detail of other income/(expense), net for 2023, 2022 and 2021 (in millions):
2021
2023
58,829 $
17,852 $
46,906
15,375
39,053
$
64,758 $
54,428
60,845
2023
$
8,819
6,552
50,010
54,293
$
2022
$
3,750 $
2,825 $
Deferred
Total
Foreign:
Current
Deferred
Total
Current
Provision for income taxes
2022
$
9,445 $
(3,644)
7,890 $
(2,265)
8,257
(7,176)
2023
Total
State:
Current
Deferred
(3,933)
(2,931)
2,843
(2,645)
(382)
(228)
60
$
(565) $
(334) $
258
Apple Inc. | 2023 Form 10-K | 39
Note 7 - Income Taxes
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for 2023, 2022 and 2021, consisted of the following (in millions):
Federal:
$
2022
2023
Other Income/(Expense), Net
$
14,433 $
(18,247) $
13,378
(18,739)
Accounts Receivable
Trade Receivables
Current and non-current term debt
As of September 24, 2022, the Company had one customer that represented 10% or more of total trade receivables, which
accounted for 10%. The Company's third-party cellular network carriers accounted for 41% and 44% of total trade receivables as
of September 30, 2023 and September 24, 2022, respectively. The Company requires third-party credit support or collateral from
certain customers to limit credit risk.
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to
these vendors who manufacture subassemblies or assemble final products for the Company. The Company purchases these
components directly from suppliers. The Company does not reflect the sale of these components in products net sales. Rather,
the Company recognizes any gain on these sales as a reduction of products cost of sales when the related final products are
sold by the Company. As of September 30, 2023, the Company had two vendors that individually represented 10% or more of
total vendor non-trade receivables, which accounted for 48% and 23%. As of September 24, 2022, the Company had two
vendors that individually represented 10% or more of total vendor non-trade receivables, which accounted for 54% and 13%.
Apple Inc. | 2023 Form 10-K | 38
Note 5 - Property, Plant and Equipment
The following table shows the Company's gross property, plant and equipment by major asset class and accumulated
depreciation as of September 30, 2023 and September 24, 2022 (in millions):
Land and buildings
Machinery, equipment and internal-use software
Vendor Non-Trade Receivables
Current and non-current marketable securities
2022
2023
Fair Value of
Derivatives Not Designated
as Accounting Hedges
Total
Fair Value
4,317 $
2,819 $
7,136
2,205 $
1,367 $
2,547 $
4,752
1,367
(1) Derivative assets are measured using Level 2 fair value inputs and are included in other current assets and other non-
current assets in the Consolidated Balance Sheet.
(2) Derivative liabilities are measured using Level 2 fair value inputs and are included in other current liabilities and other non-
current liabilities in the Consolidated Balance Sheet.
The derivative assets above represent the Company's gross credit exposure if all counterparties failed to perform. To mitigate
credit risk, the Company generally uses collateral security arrangements that provide for collateral to be received or posted when
the net fair values of certain derivatives fluctuate from contractually established thresholds. To further limit credit risk, the
Company generally uses master netting arrangements with the respective counterparties to the Company's derivative contracts,
under which the Company is allowed to settle transactions with a single net amount payable by one party to the other. As of
September 24, 2022, 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 $7.8 billion, resulting in a net
derivative asset of $412 million.
The carrying amounts of the Company's hedged items in fair value hedges as of September 30, 2023 and September 24, 2022
were as follows (in millions):
Hedged assets/(liabilities):
Leasehold improvements
5,801
Gross property, plant and equipment
Total property, plant and equipment, net
Consolidated Financial Statement Details
The following tables show the Company's consolidated financial statement details as of September 30, 2023 and September 24,
2022 (in millions):
Other Non-Current Assets
Deferred tax assets
Other non-current assets
Total other non-current assets
-
Other Current Liabilities
Other current liabilities
Total other current liabilities
Other Non-Current Liabilities
Long-term taxes payable
Other non-current liabilities
Total other non-current liabilities
Income taxes payable
Note 6
Depreciation expense on property, plant and equipment was $8.5 billion, $8.7 billion and $9.5 billion during 2023, 2022 and
2021, respectively.
42,117
2023
2022
$
23,446 $
22,126
78,314
81,060
12,839
11,271
114,599
114,457
(70,884)
(72,340)
$
43,715 $
Accumulated depreciation
5,625
1,081
1,570
3,407
Total deferred tax assets
32,743
29,206
Less: Valuation allowance
(8,374)
2,343
(7,530)
24,369
21,676
Deferred tax liabilities:
Right-of-use assets
Depreciation
Minimum tax on foreign earnings
Total deferred tax assets, net
Other
2,400
2,421
$
8,302 $
6,962
6,365
6,515
Capitalized research and development
6,294
1,267
Deferred revenue
Unrealized losses
Lease liabilities
4,571
5,742
2,447
2,913
Unrealized gains
Accrued liabilities and other reserves
Other
Net deferred tax assets
Beginning balances
Increases related to tax positions taken during a prior year
Decreases related to tax positions taken during a prior year
Increases related to tax positions taken during the current year
Decreases related to settlements with taxing authorities
Decreases related to expiration of the statute of limitations
Ending balances
2023
2022
2021
The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2023, 2022
and 2021, is as follows (in millions):
16,758 $
15,477 $
2,284
16,475
(1,982)
816
(1,402)
2,628
1,936
2,044
(1,463)
As of September 30, 2023, the total amount of gross unrecognized tax benefits was $19.5 billion, of which $9.5 billion, if
recognized, would impact the Company's effective tax rate. As of September 24, 2022, the total amount of gross unrecognized
tax benefits was $16.8 billion, of which $8.0 billion, if recognized, would have impacted the Company's effective tax rate.
Uncertain Tax Positions
As of September 30, 2023, the Company had $5.2 billion in foreign tax credit carryforwards in Ireland and $3.0 billion in
California R&D credit carryforwards, both of which can be carried forward indefinitely. A valuation allowance has been recorded
for the credit carryforwards and a portion of other temporary differences.
2,179
2,163
1,998
1,582
1,940
1,983
511
942
490
469
7,118
7,139
$
17,251 $
14,537
Total deferred tax liabilities
(19)
Tax credit carryforwards
2023
19,300 $
14,527
The foreign provision for income taxes is based on foreign pretax earnings of $72.9 billion, $71.3 billion and $68.7 billion in 2023,
2022 and 2021, respectively.
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate (21%
in 2023, 2022 and 2021) to income before provision for income taxes for 2023, 2022 and 2021, is as follows (dollars in millions):
Computed expected tax
2023
16,741 $
2022
$
23,885
$
25,012 $
22,933
State taxes, net of federal effect
2021
$
12,164
12,072
1,519
1,620
(49)
84
(338)
1,521
1,603
1,282
8,750
8,996
9,424
669
3,076
2,740
9,419
1,124
2022
1,518
Earnings of foreign subsidiaries
$
16,741
$
19,300
$
14,527
Provision for income taxes
Effective tax rate
16.2%
13.3%
Apple Inc. | 2023 Form 10-K | 40
Deferred Tax Assets and Liabilities
As of September 30, 2023 and September 24, 2022, the significant components of the Company's deferred tax assets and
liabilities were (in millions):
Deferred tax assets:
14.7%
(300)
456
(192)
(5,744)
(4,366)
(4,715)
Research and development credit, net
(1,212)
(1,153)
(1,033)
Excess tax benefits from equity awards
(1,120)
(1,871)
(2,137)
Foreign-derived intangible income deduction
(296)
(1,372)
Other
1,151
$
51.58
Rest of Asia Pacific:
2,674
3,434
1,277
5,878
3,215
$
20,736
Contingencies
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, certain
components are currently obtained from single or limited sources. The Company also competes for various components with
other participants in the markets for smartphones, personal computers, tablets, wearables and accessories. Therefore, many
components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide
shortage and significant commodity pricing fluctuations.
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 their manufacturing capacities have
increased. The continued availability of these components at acceptable prices, or at all, may be affected if suppliers decide to
concentrate on the production of common components instead of components customized to meet the Company's requirements.
Substantially all of the Company's hardware products are manufactured by outsourcing partners that are located primarily in
China mainland, India, Japan, South Korea, Taiwan and Vietnam.
Apple Inc. | 2023 Form 10-K | 46
Note 13 - Segment Information and Geographic Data
The Company manages its business primarily on a geographic basis. The Company's reportable segments consist of the
Americas, Europe, Greater China, Japan and Rest of Asia Pacific. Americas includes both North and South America. Europe
includes European countries, as well as India, the Middle East and Africa. Greater China includes China mainland, Hong Kong
and Taiwan. Rest of Asia Pacific includes Australia and those Asian countries not included in the Company's other reportable
segments. Although the reportable segments provide similar hardware and software products and similar services, each one is
managed separately to better align with the location of the Company's customers and distribution partners and the unique market
dynamics of each geographic region.
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for
geographic segments are generally based on the location of customers and sales through the Company's retail stores located in
those geographic locations. Operating income for each segment consists of net sales to third parties, related cost of sales, and
operating expenses directly attributable to the segment. The information provided to the Company's chief operating decision
maker for purposes of making decisions and assessing segment performance excludes asset information.
The following table shows information by reportable segment for 2023, 2022 and 2021 (in millions):
2023
2022
Americas:
Net sales
Operating income
Europe:
Net sales
Operating income
Greater China:
Net sales
2021
4,258
Total
Thereafter
2028
(8,144) $
180,247 $
127.98
RSUS canceled
Balance as of September 30, 2023
135.91 $
30,860
The fair value as of the respective vesting dates of RSUs was $15.9 billion, $18.2 billion and $19.0 billion for 2023, 2022 and
2021, respectively. The majority of RSUs that vested in 2023, 2022 and 2021 were net share settled such that the Company
withheld shares with a value equivalent to the employees' obligation for the applicable income and other employment taxes, and
remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 37 million, 41 million and 53
million for 2023, 2022 and 2021, respectively, and were based on the value of the RSUs on their respective vesting dates as
determined by the Company's closing stock price. Total payments to taxing authorities for employees' tax obligations were $5.6
billion, $6.4 billion and $6.8 billion in 2023, 2022 and 2021, respectively.
Apple Inc. | 2023 Form 10-K | 45
Share-Based Compensation
The following table shows share-based compensation expense and the related income tax benefit included in the Consolidated
Statements of Operations for 2023, 2022 and 2021 (in millions):
Share-based compensation expense
Income tax benefit related to share-based compensation expense
2023
$
2022
10,833 $
$
(3,421) $
9,038 $
(4,002) $
7,906
(4,056)
As of September 30, 2023, the total unrecognized compensation cost related to outstanding RSUs was $18.6 billion, which the
Company expects to recognize over a weighted-average period of 2.5 years.
Note 12 - Commitments, Contingencies and Supply Concentrations
Unconditional Purchase Obligations
The Company has entered into certain off-balance sheet commitments that require the future purchase of goods or services
("unconditional purchase obligations"). The Company's unconditional purchase obligations primarily consist of supplier
arrangements, licensed intellectual property and content, and distribution rights. Future payments under noncancelable
unconditional purchase obligations with a remaining term in excess of one year as of September 30, 2023, are as follows (in
millions):
2024
2025
2026
2027
2021
97.31
EA SA
162,560 $
60,508 $
29,375 $
26,356
11,569 $
9,817
A reconciliation of the Company's segment operating income to the Consolidated Statements of Operations for 2023, 2022 and
2021 is as follows (in millions):
2023
2022
2021
Segment operating income
$
150,888 $
Research and development expense
(29,915)
Other corporate expenses, net (1)
(6,672)
152,895 $
(26,251)
(7,207)
137,006
(21,914)
(6,143)
Total operating income
$
114,301 $
119,437 $
108,949
(1) Includes corporate marketing expenses, certain share-based compensation expenses, various nonrecurring charges, and
other separately managed general and administrative costs.
Apple Inc. | 2023 Form 10-K | 47
Total proceeds from/(repayments of) commercial paper, net
29,615 $
12,066 $
12,798
12,257 $
11,888 $
169,658 $
62,683 $
153,306
53,382
94,294 $
95,118 $
89,307
36,098 $
35,233 $
32,505
Operating income
SASA
$
72,559 $
74,200 $
$
68,366
30,328 $
31,153
$
28,504
Japan:
Net sales
Operating income
Net sales
Operating income
EA
24,257 $
25,977
28,482
$
(101,878) $
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 resolved. The outcome of litigation is inherently uncertain. 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 greater than a recorded accrual,
concerning loss contingencies for asserted legal and other claims.
88,768 $
(356)
(1,113)
105,103
(9,822)
$
95,281
(374)
(1,363)
110,087
(11,128)
$
98,959
To manage interest rate risk on certain of its U.S. dollar-denominated fixed-rate notes, the Company uses interest rate swaps to
effectively convert the fixed interest rates to floating interest rates on a portion of these notes. Additionally, to manage foreign
exchange rate risk on certain of its foreign currency-denominated notes, the Company uses cross-currency swaps to effectively
convert these notes to U.S. dollar-denominated notes.
Total non-current portion of term debt
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount or premium and, if
applicable, adjustments related to hedging. The Company recognized $3.7 billion, $2.8 billion and $2.6 billion of interest expense
on its term debt for 2023, 2022 and 2021, respectively.
2024
2025
2026
2027
2028
$
9,943
10,775
12,265
9,786
7,800
Thereafter
56,003
The future principal payments for the Company's Notes as of September 30, 2023, are as follows (in millions):
Total term debt principal
Less: Current portion of term debt
Hedge accounting fair value adjustments
(3,978) $
3,955
$
1,022
Apple Inc. | 2023 Form 10-K | 43
Term Debt
The Company has outstanding Notes, which are senior unsecured obligations with interest payable in arrears. The following
table provides a summary of the Company's term debt as of September 30, 2023 and September 24, 2022:
2013-2022 debt issuances:
Fixed-rate 0.000% - 4.650% notes
Maturities
(calendar year) (in millions)
2023
Amount
2022
Total term debt
Effective
Interest Rate
Effective
Interest Rate
2024-2062 $ 101,322
0.03% 6.72%
$
111,824
150.87
Third quarter 2023 debt issuance:
Fixed-rate 4.000% - 4.850% notes
Total term debt principal
2026 - 2053
5,250
106,572
4.04% -4.88%
111,824
Unamortized premium/(discount) and issuance
costs, net
Amount
(in millions)
$
0.03% 4.78%
As of September 30, 2023 and September 24, 2022, the fair value of the Company's Notes, based on Level 2 inputs, was $90.8
billion and $98.8 billion, respectively.
RSUS canceled
Balance as of September 25, 2021
RSUS granted
RSUs vested
RSUS canceled
Balance as of September 24, 2022
RSUs granted
RSUS vested
Weighted-Average
Grant Date Fair
Value Per RSU
Aggregate
Fair Value
(in millions)
$
RSUS vested
116.33
50.71
(13,948) $
240,427 $
75.16
91,674 $
150.70
(115,861)
72.12
(14,739) $
99.77
201,501 $
109.48
106,572
(145,766) $
Number of
RSUS
(in thousands)
310,778
89,363 $
68.95
Balance as of September 26, 2020
Note 10 - Shareholders' Equity
RSUS granted
Share Repurchase Program
During 2023, the Company repurchased 471 million shares of its common stock for $76.6 billion, excluding excise tax due under
the Inflation Reduction Act of 2022. The Company's share repurchase programs do not obligate the Company to acquire a
minimum amount of shares. Under the programs, shares may be repurchased in privately negotiated or open market
transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
Apple Inc. | 2023 Form 10-K | 44
Shares of Common Stock
The following table shows the changes in shares of common stock for 2023, 2022 and 2021 (in thousands):
2023
15,943,425
2022
16,426,786
2021
16,976,763
Common stock repurchased
Common stock issued, net of shares withheld for employee taxes
Common stock outstanding, ending balances
(471,419)
78,055
(568,589)
Common stock outstanding, beginning balances
85,228
A summary of the Company's RSU activity and related information for 2023, 2022 and 2021, is as follows:
Restricted Stock Units
(656,340)
2014 Employee Stock Plan
The Apple Inc. 2022 Employee Stock Plan (the "2022 Plan") is a shareholder-approved plan that provides for broad-based equity
grants to employees, including executive officers, and permits the granting of RSUs, stock grants, performance-based awards,
stock options and stock appreciation rights. RSUs granted under the 2022 Plan generally vest over four years, based on
continued employment, and are settled upon vesting in shares of the Company's common stock on a one-for-one basis. All
RSUS granted under the 2022 Plan have dividend equivalent rights, which entitle holders of RSUs to the same dividend value
per share as holders of common stock. A maximum of approximately 1.3 billion shares were authorized for issuance pursuant to
2022 Plan awards at the time the plan was approved on March 4, 2022.
2022 Employee Stock Plan
The Apple Inc. 2014 Employee Stock Plan (the “2014 Plan") is a shareholder-approved plan that provided for broad-based equity
grants to employees, including executive officers. The 2014 Plan permitted the granting of substantially the same types of equity
awards with substantially the same terms as the 2022 Plan. The 2014 Plan also permitted the granting of cash bonus awards. In
the third quarter of 2022, the Company terminated the authority to grant new awards under the 2014 Plan.
16,426,786
15,943,425
106,363
15,550,061
Note 11 - Share-Based Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be included in the 2024 Proxy Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the 2024 Proxy Statement, and is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information required by this Item will be included in the 2024 Proxy Statement, and is incorporated herein by reference.
Apple Inc. | 2023 Form 10-K | 53
PART IV
Item 15. Exhibit and Financial Statement Schedules
(1) All financial statements
Index to Consolidated Financial Statements
Page
29
Consolidated Statements of Operations for the years ended September 30, 2023, September 24, 2022 and
September 25, 2021
28
Consolidated Statements of Comprehensive Income for the years ended September 30, 2023, September 24,
2022 and September 25, 2021
Consolidated Balance Sheets as of September 30, 2023 and September 24, 2022
30
(a) Documents filed as part of this report
The information required by this Item will be included in the 2024 Proxy Statement, and is incorporated herein by reference.
Changes in Internal Control over Financial Reporting
The information required by this Item will be included in the Company's definitive proxy statement to be filed with the SEC within
120 days after September 30, 2023, in connection with the solicitation of proxies for the Company's 2024 annual meeting of
shareholders (the "2024 Proxy Statement"), and is incorporated herein by reference.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that the Company's receipts and expenditures are being made only in
accordance with authorizations of the Company's management and directors; and
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets;
Consolidated Statements of Shareholders' Equity for the years ended September 30, 2023, September 24, 2022
and September 25, 2021
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company's assets that could have a material effect on the financial statements.
Management, including the Company's Chief Executive Officer and Chief Financial Officer, does not expect that the Company's
internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of
controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in
business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
-
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the
Company's internal control over financial reporting based on the criteria set forth in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the Company's
assessment, management has concluded that its internal control over financial reporting was effective as of September 30, 2023
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with GAAP. The Company's independent registered public accounting firm, Ernst & Young LLP, has issued an audit
report on the Company's internal control over financial reporting, which appears in Part II, Item 8 of this Form 10-K.
Item 11. Executive Compensation
There were no changes in the Company's internal control over financial reporting during the fourth quarter of 2023, which were
identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the
Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over
financial reporting.
Item 9B.
Other Information
Insider Trading Arrangements
On August 30, 2023, Deirdre O'Brien, the Company's Senior Vice President, Retail, and Jeff Williams, the Company's Chief
Operating Officer, each entered into a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under
the Exchange Act. The plans provide for the sale of all shares vested during the duration of the plans pursuant to certain equity
awards granted to Ms. O'Brien and Mr. Williams, respectively, excluding any shares withheld by the Company to satisfy income
tax withholding and remittance obligations. Ms. O'Brien's plan will expire on October 15, 2024, and Mr. Williams' plan will expire
on December 15, 2024, subject to early termination for certain specified events set forth in the plans.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Apple Inc. | 2023 Form 10-K | 52
Consolidated Statements of Cash Flows for the years ended September 30, 2023, September 24, 2022 and
September 25, 2021
4.2
Reports of Independent Registered Public Accounting Firm*
8/7/20
8-K
3.2
8/19/22
Indenture, dated as of April 29, 2013, between the Registrant and The Bank of S-3
New York Mellon Trust Company, N.A., as Trustee.
4.1
4/29/13
4.3
3.1
Officer's Certificate of the Registrant, dated as of May 3, 2013, including forms of 8-K
global notes representing the Floating Rate Notes due 2016, Floating Rate
Notes due 2018, 0.45% Notes due 2016, 1.00% Notes due 2018, 2.40% Notes
due 2023 and 3.85% Notes due 2043.
5/3/13
4.4
Officer's Certificate of the Registrant, dated as of May 6, 2014, including forms of 8-K
global notes representing the Floating Rate Notes due 2017, Floating Rate
Notes due 2019, 1.05% Notes due 2017, 2.10% Notes due 2019, 2.85% Notes
due 2021, 3.45% Notes due 2024 and 4.45% Notes due 2044.
4.1
5/6/14
4.5
Officer's Certificate of the Registrant, dated as of November 10, 2014, including 8-K
forms of global notes representing the 1.000% Notes due 2022 and 1.625%
Notes due 2026.
(ii)
4.1
8-K
Restated Articles of Incorporation of the Registrant filed on August 3, 2020.
Amended and Restated Bylaws of the Registrant effective as of August 17, 2022.
Description of Securities of the Registrant.
4.1**
*
Ernst & Young LLP, PCAOB Firm ID No. 00042.
31
32
33
49
(2) Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts
sufficient to require submission of the schedule, or because the information required is included in the consolidated financial
statements and accompanying notes included in this Form 10-K.
(3) Exhibits required by Item 601 of Regulation S-K (1)
Incorporated by Reference
Filing Date/
Exhibit
Number
Period End
Exhibit Description
Form
Exhibit
Date
3.1
3.2
Notes to Consolidated Financial Statements
(i)
10.1
Inherent Limitations over Internal Controls
172,153
172,269
163,648
$
383,285 $
394,328 $
365,817
2023
68,366
2022
33,276 $
31,119
5,778
7,260
4,661
3,738
$
43,715 $
$
74,200
133,803
147,859 $
4.1
The U.S. and China were the only countries that accounted for more than 10% of the Company's net sales in 2023, 2022 and
2021. Net sales for 2023, 2022 and 2021 and long-lived assets as of September 30, 2023 and September 24, 2022 were as
follows (in millions):
Net sales:
U.S.
China (1)
Other countries
Total net sales
Long-lived assets:
U.S.
China (1)
Other countries
Total long-lived assets
(1) China includes Hong Kong and Taiwan.
Apple Inc. | 2023 Form 10-K | 48
2023
2022
2021
$
138,573 $
72,559
42,117
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Inc.
Opinion on the Financial Statements
We have audited Apple Inc.'s internal control over financial reporting as of September 30, 2023, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) (the “COSO criteria"). In our opinion, Apple Inc. maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the
"PCAOB"), the consolidated balance sheets of Apple Inc. as of September 30, 2023 and September 24, 2022, the related
consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years
in the period ended September 30, 2023, and the related notes and our report dated November 2, 2023 expressed an
unqualified opinion thereon.
Basis for Opinion
Apple Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on Apple Inc.'s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S.
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
November 2, 2023
Apple Inc. | 2023 Form 10-K | 51
Item 9.
None.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company's management, the Company's principal
executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of September 30, 2023 to provide reasonable
assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is
(i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and
(ii) accumulated and communicated to the Company's management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosure.
Opinion on Internal Control Over Financial Reporting
The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company's
internal control over financial reporting includes those policies and procedures that:
8-K
Apple Inc. | 2023 Form 10-K | 50
We have audited the accompanying consolidated balance sheets of Apple Inc. as of September 30, 2023 and September 24,
2022, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of
the three years in the period ended September 30, 2023, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of Apple Inc. at
September 30, 2023 and September 24, 2022, and the results of its operations and its cash flows for each of the three years in
the period ended September 30, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the
"PCAOB"), Apple Inc.'s internal control over financial reporting as of September 30, 2023, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated November 2, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of Apple Inc.'s management. Our responsibility is to express an opinion on
Apple Inc.'s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to Apple Inc. in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on
the account or disclosure to which it relates.
Description of the Matter
Uncertain Tax Positions
As discussed in Note 7 to the financial statements, Apple Inc. is subject to taxation and files
income tax returns in the U.S. federal jurisdiction and many state and foreign jurisdictions.
As of September 30, 2023, the total amount of gross unrecognized tax benefits was $19.5
billion, of which $9.5 billion, if recognized, would impact Apple Inc.'s effective tax rate. In
accounting for some of the uncertain tax positions, Apple Inc. uses significant judgment in
the interpretation and application of complex domestic and international tax laws.
Auditing management's evaluation of whether an uncertain tax position is more likely than
not to be sustained and the measurement of the benefit of various tax positions can be
complex, involves significant judgment, and is based on interpretations of tax laws and legal
rulings.
Apple Inc. | 2023 Form 10-K | 49
How We Addressed the
Matter in Our Audit
We tested controls relating to the evaluation of uncertain tax positions, including controls
over management's assessment as to whether tax positions are more likely than not to be
sustained, management's process to measure the benefit of its tax positions, and the
development of the related disclosures.
To evaluate Apple Inc.'s assessment of which tax positions are more likely than not to be
sustained, our audit procedures included, among others, reading and evaluating
management's assumptions and analysis, and, as applicable, Apple Inc.'s communications
with taxing authorities, that detailed the basis and technical merits of the uncertain tax
positions. We involved our tax subject matter resources in assessing the technical merits of
certain of Apple Inc.'s tax positions based on our knowledge of relevant tax laws and
experience with related taxing authorities. For certain tax positions, we also received
external legal counsel confirmation letters and discussed the matters with external advisors
and Apple Inc. tax personnel. In addition, we evaluated Apple Inc.'s disclosure in relation to
these matters included in Note 7 to the financial statements.
/s/ Ernst & Young LLP
We have served as Apple Inc.'s auditor since 2009.
San Jose, California
November 2, 2023
Report of Independent Registered Public Accounting Firm
11/10/14
To the Shareholders and the Board of Directors of Apple Inc.
Officer's Certificate of the Registrant, dated as of February 9, 2015, including 8-K
forms of global notes representing the Floating Rate Notes due 2020, 1.55%
Notes due 2020, 2.15% Notes due 2022, 2.50% Notes due 2025 and 3.45%
Notes due 2045.
9/29/18
10.8*
Form of Performance Award Agreement under 2014 Employee Stock Plan 10-K
effective as of August 21, 2018.
10.18 9/29/18
10.9*
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock 10-K
Plan effective as of September 29, 2019.
10.15
9/28/19
10.10*
Form of Performance Award Agreement under 2014 Employee Stock Plan 10-K
effective as of September 29, 2019.
10.16
10.17
9/28/19
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock 10-K
Plan effective as of August 18, 2020.
10.16
9/26/20
10.12*
Form of Performance Award Agreement under 2014 Employee Stock Plan 10-K
effective as of August 18, 2020.
10.17
9/26/20
10.13*
Form of CEO Restricted Stock Unit Award Agreement under 2014 Employee 10-Q
Stock Plan effective as of September 27, 2020.
10.1
12/26/20
10.11*
10.14*
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock 10-K
Plan effective as of August 21, 2018.
3/31/18
10.1*
Apple Inc. Employee Stock Purchase Plan, as amended and restated as of 8-K
March 10, 2015.
10.1
3/13/15
10.2*
Form of Indemnification Agreement between the Registrant and each director 10-Q
and executive officer of the Registrant.
10.2
6/27/09
10.3*
10.4*
Apple Inc. Non-Employee Director Stock Plan, as amended November 9, 2021.
Apple Inc. 2014 Employee Stock Plan, as amended and restated as of October 1,
2017.
10.7*
10-Q
12/25/21
10-K
10.8
9/30/17
10.5*
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock 10-K
Plan effective as of September 26, 2017.
10.20
9/30/17
10.6*
Form of Restricted Stock Unit Award Agreement under Non-Employee Director 10-Q
Stock Plan effective as of February 13, 2018.
10.2
10.1
8/23/18
Form of CEO Performance Award Agreement under 2014 Employee Stock Plan 10-Q
effective as of September 27, 2020.
12/26/20
**
Indicates management contract or compensatory plan or arrangement.
Inline XBRL for the cover page of this Annual Report on Form 10-K, included in
the Exhibit 101 Inline XBRL Document Set.
Exhibit Description
Exhibit
Number
104**
Apple Inc. | 2023 Form 10-K | 56
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
Inline XBRL Document Set for the consolidated financial statements and
accompanying notes in Part II, Item 8, "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K.
31.2**
32.1***
101**
31.1**
Power of Attorney (included on the Signatures page of this Annual Report on
Form 10-K).
24.1**
Filed herewith.
Consent of Independent Registered Public Accounting Firm.
Subsidiaries of the Registrant.
21.1**
12/31/22
10.2
Form of CEO Performance Award Agreement under 2022 Employee Stock Plan 10-Q
effective as of September 25, 2022.
10.20*
12/31/22
10.1
Form of CEO Restricted Stock Unit Award Agreement under 2022 Employee 10-Q
Stock Plan effective as of September 25, 2022.
10.19*
8/19/22
23.1**
10.2
***
Incorporated by Reference
10.15*
Apple Inc. 2022 Employee Stock Plan.
8-K
10.1
3/4/22
10.16*
Form of Restricted Stock Unit Award Agreement under 2022 Employee Stock 8-K
Plan effective as of March 4, 2022.
4.6
10.2
3/4/22
10.17*
Furnished herewith.
Form of Performance Award Agreement under 2022 Employee Stock Plan 8-K
effective as of March 4, 2022.
3/4/22
10.18*
Apple Inc. Executive Cash Incentive Plan.
Apple Inc. | 2023 Form 10-K | 57
None.
Item 16. Form 10-K Summary
(1) Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item
601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such
instruments.
Date
Exhibit
Form
Filing Date/
Period End
10.3
4.1
Management's Annual Report on Internal Control over Financial Reporting
Apple Inc. Deferred Compensation Plan.
Exhibit
Form
Filing Date/
Period End
Incorporated by Reference
9/17/15
4.1
Officer's Certificate of the Registrant, dated as of September 17, 2015, including 8-K
forms of global notes representing the 1.375% Notes due 2024 and 2.000%
Notes due 2027.
4.9
7/31/15
4.1
5/13/15
Date
4.1
4.8
4.7
2/9/15
4.1
4.16
Officer's Certificate of the Registrant, dated as of June 20, 2017, including form of 8-K
global note representing the 3.000% Notes due 2027.
4.1
6/20/17
4.17
Officer's Certificate of the Registrant, dated as of August 18, 2017, including form 8-K
of global note representing the 2.513% Notes due 2024.
4.1
Officer's Certificate of the Registrant, dated as of May 13, 2015, including forms 8-K
of global notes representing the Floating Rate Notes due 2017, Floating Rate
Notes due 2020, 0.900% Notes due 2017, 2.000% Notes due 2020, 2.700%
Notes due 2022, 3.200% Notes due 2025, and 4.375% Notes due 2045.
Officer's Certificate of the Registrant, dated as of July 31, 2015, including forms 8-K
of global notes representing the 3.05% Notes due 2029 and 3.60% Notes due
2042.
8/18/17
4.1
Exhibit
Number
S-8
4.1
Officer's Certificate of the Registrant, dated as of May 24, 2017, including forms 8-K
of global notes representing the 0.875% Notes due 2025 and 1.375% Notes
due 2029.
4.15
5/11/17
4.1
Officer's Certificate of the Registrant, dated as of May 11, 2017, including forms 8-K
of global notes representing the Floating Rate Notes due 2020, Floating Rate
Notes due 2022, 1.800% Notes due 2020, 2.300% Notes due 2022, 2.850%
Notes due 2024 and 3.200% Notes due 2027.
4.14
2/9/17
5/24/17
4.1
2/23/16
Officer's Certificate of the Registrant, dated as of February 9, 2017, including 8-K
forms of global notes representing the Floating Rate Notes due 2019, Floating
Rate Notes due 2020, Floating Rate Notes due 2022, 1.550% Notes due 2019,
1.900% Notes due 2020, 2.500% Notes due 2022, 3.000% Notes due 2024,
3.350% Notes due 2027 and 4.250% Notes due 2047.
8/4/16
4.1
Officer's Certificate of the Registrant, dated as of August 4, 2016, including forms 8-K
of global notes representing the Floating Rate Notes due 2019, 1.100% Notes
due 2019, 1.550% Notes due 2021, 2.450% Notes due 2026 and 3.850%
Notes due 2046.
4.12
3/24/16
4.1
Supplement No. 1 to the Officer's Certificate of the Registrant, dated as of March 8-K
24, 2016.
4.11
Officer's Certificate of the Registrant, dated as of February 23, 2016, including 8-K
forms of global notes representing the Floating Rate Notes due 2019, Floating
Rate Notes due 2021, 1.300% Notes due 2018, 1.700% Notes due 2019,
2.250% Notes due 2021, 2.850% Notes due 2023, 3.250% Notes due 2026,
4.500% Notes due 2036 and 4.650% Notes due 2046.
Exhibit Description
4.10
4.13
4.18
Apple Inc. | 2023 Form 10-K | 54
4.1
2/8/21
4.26
Officer's Certificate of the Registrant, dated as of August 5, 2021, including forms 8-K
of global notes representing the 1.400% Notes due 2028, 1.700% Notes due
2031, 2.700% Notes due 2051 and 2.850% Notes due 2061.
4.1
8/5/21
4.27
Indenture, dated as of October 28, 2021, between the Registrant and The Bank S-3
of New York Mellon Trust Company, N.A., as Trustee.
4.1
4.28
Officer's Certificate of the Registrant, dated as of August 8, 2022, including forms 8-K
of global notes representing the 3.250% Notes due 2029, 3.350% Notes due
2032, 3.950% Notes due 2052 and 4.100% Notes due 2062.
4.1
8/8/22
Apple Inc. | 2023 Form 10-K | 55
Exhibit
Number
4.29
Incorporated by Reference
Officer's Certificate of the Registrant, dated as of September 12, 2017, including 8-K
forms of global notes representing the 1.500% Notes due 2019, 2.100% Notes
due 2022, 2.900% Notes due 2027 and 3.750% Notes due 2047.
4.30*
Filing Date/
Period End
Form
Exhibit
Date
4.1
5/10/23
Exhibit Description
Officer's Certificate of the Registrant, dated as of May 10, 2023, including forms 8-K
of global notes representing the 4.421% Notes due 2026, 4.000% Notes due
2028, 4.150% Notes due 2030, 4.300% Notes due 2033 and 4.850% Notes
due 2053.
4.1
Officer's Certificate of the Registrant, dated as of February 8, 2021, including 8-K
forms of global notes representing the 0.700% Notes due 2026, 1.200% Notes
due 2028, 1.650% Notes due 2031, 2.375% Notes due 2041, 2.650% Notes
due 2051 and 2.800% Notes due 2061.
10/29/21
8/20/20
4.1
Indenture, dated as of November 5, 2018, between the Registrant and The Bank S-3
of New York Mellon Trust Company, N.A., as Trustee.
11/5/18
4.20
11/13/17
4.1
4.25
Officer's Certificate of the Registrant, dated as of November 13, 2017, including 8-K
forms of global notes representing the 1.800% Notes due 2019, 2.000% Notes
due 2020, 2.400% Notes due 2023, 2.750% Notes due 2025, 3.000% Notes
due 2027 and 3.750% Notes due 2047.
4.21
Officer's Certificate of the Registrant, dated as of September 11, 2019, including 8-K
forms of global notes representing the 1.700% Notes due 2022, 1.800% Notes
due 2024, 2.050% Notes due 2026, 2.200% Notes due 2029 and 2.950%
Notes due 2049.
4.19
9/12/17
9/11/19
4.1
Officer's Certificate of the Registrant, dated as of May 11, 2020, including forms 8-K
of global notes representing the 0.750% Notes due 2023, 1.125% Notes due
2025, 1.650% Notes due 2030 and 2.650% Notes due 2050.
4.1
Officer's Certificate of the Registrant, dated as of August 20, 2020, including 8-K
forms of global notes representing the 0.550% Notes due 2025, 1.25% Notes
due 2030, 2.400% Notes due 2050 and 2.550% Notes due 2060.
Officer's Certificate of the Registrant, dated as of November 15, 2019, including 8-K
forms of global notes representing the 0.000% Notes due 2025 and 0.500%
Notes due 2031.
4.1
11/15/19
4.24
4.23
4.22
4.1
5/11/20
(4) to any Tax that is imposed otherwise than by withholding by the Company or a Paying Agent from the
payment;
(f) being a bank receiving payments on an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of its trade or business;
(3) to any Tax that would not have been imposed but for the failure of the holder or any other person to
comply with certification, identification or information reporting requirements concerning the nationality,
residence, identity or connection with the United States of the holder or beneficial owner of the Notes, if
compliance is required by statute, by regulation of the United States or any taxing authority therein or by
an applicable income tax treaty to which the United States is a party as a precondition to exemption
from such Tax (including, but not limited to, the requirement to provide Internal Revenue Service Forms
W-8BEN, W-8BEN-E, W-8ECI, or any subsequent versions thereof or successor thereto, and any
documentation requirement under an applicable income tax treaty);
(2) to any holder that is not the sole beneficial owner of the Notes, or a portion of the Notes, or that is a
fiduciary, partnership or limited liability company, but only to the extent that a beneficial owner with
respect to the holder, a beneficiary or settlor with respect to the fiduciary, or a beneficial owner or
member of the partnership or limited liability company would not have been entitled to the payment of
an additional amount had the beneficiary, settlor, beneficial owner or member received directly its
beneficial or distributive share of the payment;
(e) being a controlled foreign corporation that is related to the Company within the meaning of Section
864(d)(4) of the Code; or
(5) to any Tax that would not have been imposed but for a change in law, regulation, or administrative or
judicial interpretation that becomes effective more than 10 days after the payment becomes due or is
duly provided for, whichever occurs later;
States person under any applicable Treasury regulations), or any estate or trust the income of which is subject to U.S.
federal income taxation regardless of its source.
(7) to any Tax required to be withheld by any paying agent from any payment of principal of or interest on
any Note, if such payment can be made without such withholding by at least one other paying agent;
(8) to any Tax that would not have been imposed but for the presentation by the holder of any Note, where
presentation is required, for payment on a date more than 30 days after the date on which payment
became due and payable or the date on which payment thereof is duly provided for, whichever occurs
later;
(9) to any Tax imposed under Sections 1471 through 1474 of the Code (or any amended or successor
provisions), any current or future regulations or official interpretations thereof, any agreement entered
into pursuant to Section 1471(b) of the Code, or any fiscal or regulatory legislation, rules or practices
adopted pursuant to any intergovernmental agreement entered into in connection with the
implementation of such sections of the Code; or
(10) in the case of any combination of items (1) through (9) above.
The Notes are subject in all cases to any tax, fiscal or other law or regulation or administrative or judicial
interpretation applicable to the Notes. Except as specifically provided under this heading "-Payment of Additional
Amounts," the Company will not be required to make any payment for any Tax imposed by any government or a
political subdivision or taxing authority of or in any government or political subdivision. As used under “—Payment of
Additional Amounts" and under "-Redemption for Tax Reasons," the term "United States" means the United States
of America (including the states and the District of Columbia and any political subdivision thereof), and the term
"United States person” means any individual who is a citizen or resident of the United States for U.S. federal income
tax purposes, a corporation, partnership or other entity created or organized in or under the laws of the United States,
any state of the United States or the District of Columbia (other than a partnership that is not treated as a United
6
Redemption for Tax Reasons
If, as a result of any change in, or amendment to, or, in the case of the 0.000% 2025 Notes and the 2031
Notes, introduction of, the laws (or any regulations or rulings promulgated under the laws) of the United States (or any
political subdivision or taxing authority of or in the United States), or any change in, or amendments to, an official
position regarding the application or interpretation of such laws, regulations or rulings, which change or amendment is
announced or becomes effective on or after the date of the applicable prospectus supplement, we become, or based
upon a written opinion of independent counsel selected by us, will become obligated to pay additional amounts as
described above under the heading "Payments of Additional Amounts" with respect to a series of the Notes, then we
may at our option redeem, in whole, but not in part, in the case of the 2024 Notes, the 2026 Notes, the 2027 Notes,
the 3.050% 2029 Notes and the 2042 Notes, the Notes of such series on not less than 30 nor more than 60 days'
prior notice, in the case of the 0.875% 2025 Notes and the 1.375% 2029 Notes, the Notes of such series on not less
than 15 nor more than 60 days' notice, and in the case of the 0.000% 2025 Notes and the 2031 Notes, the Notes of
such series on not less than 10 nor more than 60 days' prior notice, in each case at a redemption price equal to 100%
of their principal amount, together with interest accrued but unpaid on those Notes to (and, in the case of the 0.000%
2025 Notes and the 2031 Notes, but not including) the date fixed for redemption.
Optional Redemption
We may redeem the 2024 Notes, the 2026 Notes, the 2027 Notes, the 3.050% 2029 Notes and the 2042
Notes at our option, at any time in whole or from time to time in part, at a redemption price equal to the greater of:
•
(d) being or having been a "10-percent shareholder" of the Company as defined in Section 871(h)(3) of
the Internal Revenue Code of 1986, as amended (the "Code");
100% of the principal amount of the Notes to be redeemed; or
(6) to any estate, inheritance, gift, sales, excise, transfer, wealth, capital gains or personal property or
similar Tax;
5
The 2031 Notes
(b) having a current or former connection with the United States (other than a connection arising solely
as a result of the ownership of the Notes, the receipt of any payment or the enforcement of any
rights hereunder), including being or having been a citizen or resident of the United States;
•
The 1.375% 2029 Notes
We issued €1,250,000,000 aggregate principal amount of the 1.375% 2029 Notes on May 24, 2017. The
maturity date of the 1.375% 2029 Notes is May 24, 2029, and interest at a rate of 1.375% per annum is paid annually
on May 24 of each year, beginning on May 24, 2018, and on the maturity date. As of October 20, 2023,
€1,250,000,000 aggregate principal amount of the 1.375% 2029 Notes was outstanding.
The 3.050% 2029 Notes
We issued £750,000,000 aggregate principal amount of the 3.050% 2029 Notes on July 31, 2015. The
maturity date of the 3.050% 2029 Notes is July 31, 2029, and interest at a rate of 3.050% per annum is paid semi-
annually on January 31 and July 31 of each year, beginning on January 31, 2016, and on the maturity date. As of
October 20, 2023, £750,000,000 aggregate principal amount of the 3.050% 2029 Notes was outstanding.
We issued €1,000,000,000 aggregate principal amount of the 2031 Notes on November 15, 2019. The
maturity date of the 2031 Notes is November 15, 2031, and interest at a rate of 0.500% per annum is paid annually
on November 15 of each year, beginning on November 15, 2020, and on the maturity date. As of October 20, 2023,
€1,000,000,000 aggregate principal amount of the 2031 Notes was outstanding.
The 2042 Notes
We issued £500,000,000 aggregate principal amount of the 2042 Notes on July 31, 2015. The maturity date
of the 2042 Notes is July 31, 2042, and interest at a rate of 3.600% per annum is paid semi-annually on January 31
and July 31 of each year, beginning on January 31, 2016, and on the maturity date. As of October 20, 2023,
£500,000,000 aggregate principal amount of the 2042 Notes was outstanding.
Ranking
The Notes are our senior unsecured indebtedness and rank equally with each other and with all of our other
senior unsecured and unsubordinated indebtedness from time to time outstanding. However, the Notes are
structurally subordinated to any indebtedness and preferred stock, if any, of our subsidiaries and are effectively
subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness.
Claims of the creditors of our subsidiaries generally have priority with respect to the assets and earnings of such
subsidiaries over the claims of our creditors, including holders of the Notes. Accordingly, the Notes are effectively
subordinated to creditors, including trade creditors and preferred stockholders, if any, of our subsidiaries. The
Indentures do not restrict our ability or that of our subsidiaries to incur additional indebtedness.
Payment on the Notes
All payments of principal of, the redemption price (if any), and interest and additional amounts (if any) on the
2024 Notes, the 0.000% 2025 Notes, the 0.875% 2025 Notes, the 2026 Notes, the 2027 Notes, the 1.375% 2029
Notes and the 2031 Notes are payable in euro, provided that, if the euro is unavailable to the Company due to the
imposition of exchange controls or other circumstances beyond the Company's control, or if the euro is no longer
being used by the then member states of the European Monetary Union that have adopted the euro as their currency
or for the settlement of transactions by public institutions of or within the international banking community, then all
payments in respect of the 2024 Notes, the 0.000% 2025 Notes, the 0.875% 2025 Notes, the 2026 Notes, the 2027
Notes, the 1.375% 2029 Notes and the 2031 Notes will be made in U.S. dollars, until the euro is again available to the
Company or so used. The amount payable on any date in euro will be converted into U.S. dollars at the rate
mandated by the U.S. Federal Reserve Board as of the close of business on the second Business Day prior to the
relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the
basis of the most recent U.S. dollar/euro exchange rate published in The Wall Street Journal on or prior to the second
Business Day prior to the relevant payment date. Any payment in respect of the 2024 Notes, the 0.000% 2025 Notes,
the 0.875% 2025 Notes, the 2026 Notes, the 2027 Notes, the 1.375% 2029 Notes and the 2031 Notes so made in
U.S. dollars will not constitute an event of default under such Notes or the applicable Indenture.
With respect to the 2024 Notes, the 0.000% 2025 Notes, the 0.875% 2025 Notes, the 2026 Notes, the 2027
Notes, the 1.375% 2029 Notes and the 2031 Notes, “Business Day" means any day, other than a Saturday or
Sunday, (1) which is not a day on which banking institutions in The City of New York or London are authorized or
required by law, regulation or executive order to close and (2) on which the Trans-European Automated Real-time
Gross Settlement Express Transfer system (the TARGET2 system), or any successor thereto, is open.
All payments of principal of, the redemption price (if any), and interest and additional amounts (if any) on the
3.050% 2029 Notes and the 2042 Notes are payable in pounds sterling, or, if the United Kingdom adopts euro as its
lawful currency,
, in euro. If pounds sterling or, in the event the Notes are redenominated into euro, euro is unavailable
to the Company due to the imposition of exchange controls or other circumstances beyond the Company's control or,
in the event the notes are redenominated into euro, the euro is no longer being used by the then member states of
the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by
public institutions of or within the international banking community, then all payments in respect of the 3.050% 2029
Notes and the 2042 Notes will be made in U.S. dollars until the pound sterling or euro, as the case may be, is again
available to the Company or so used. The amount payable on any date in pounds sterling or, in the event such Notes
are redenominated into euro, euro will be converted into U.S. dollars at the rate mandated by the U.S. Federal
Reserve Board as of the close of business on the second Business Day prior to the relevant payment date or, in the
event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the basis of the most recent U.S.
dollar/pounds sterling or, in the event the Notes are redenominated into euro, the most recent U.S. dollar/euro
exchange rate published in The Wall Street Journal on or prior to the second Business Day prior to the relevant
payment date. Any payment in respect of the 3.050% 2029 Notes and the 2042 Notes so made in U.S. dollars will not
constitute an event of default under such Notes or the 2013 Indenture.
With respect to the 3.050% 2029 Notes and the 2042 Notes, “Business Day” means any day which is not a
day on which banking institutions in The City of New York or London or the relevant place of payment are authorized
or required by law, regulation or executive order to close.
Payment of Additional Amounts
The terms of the Notes state that all payments of principal and interest in respect of the Notes will be made
free and clear of, and without deduction or withholding for or on account of any present or future taxes, duties,
assessments or other governmental charges of whatsoever nature required to be deducted or withheld by the United
States or any political subdivision or taxing authority of or in the United States, unless such withholding or deduction
is required by law.
All of the Notes also contain a covenant substantially similar to the following:
The Company will, subject to the exceptions and limitations set forth below, pay as additional interest on the
Notes such additional amounts ("Additional Amounts") as are necessary in order that the net payment by the
Company or the paying agent of the Company for the applicable Notes ("Paying Agent") of the principal of and
interest on the Notes to a holder who is not a United States person (as defined below), after withholding or deduction
for any present or future tax, assessment or other governmental charge ("Tax") imposed by the United States or a
taxing authority in the United States, will not be less than the amount provided in the Notes to be then due and
payable; provided, however, that the foregoing obligation to pay Additional Amounts shall not apply:
(1) to any Tax that is imposed by reason of the holder (or the beneficial owner for whose benefit such
holder holds the Notes), or a fiduciary, settlor, beneficiary, member or shareholder of the holder if the
holder is an estate, trust, partnership or corporation, or a person holding a power over an estate or trust
administered by a fiduciary holder, being considered as:
(a) being or having been engaged in a trade or business in the United States or having or having had a
permanent establishment in the United States;
(c) being or having been a personal holding company, a passive foreign investment company or a
controlled foreign corporation for U.S. federal income tax purposes or a corporation that has
accumulated earnings to avoid U.S. federal income tax;
the sum of the present values of the remaining scheduled payments of principal and interest thereon
(not including any portion of such payments of interest accrued as of the date of redemption),
discounted to the date of redemption on an annual basis (ACTUAL/ACTUAL (ICMA)) at the applicable
Comparable Government Bond Rate (as defined below), plus 10 basis points in the case of the 2026
Notes, plus 15 basis points in the case of the 2024 Notes, the 3.050% 2029 Notes and the 2042 Notes
and plus 20 basis points in the case of the 2027 Notes.
(4) we, pursuant to or within the meaning of the Bankruptcy Law:
•
If we consolidate or merge with or into any other person or sell, transfer, lease or convey all or substantially
all of our properties and assets in accordance with the Indentures, the Successor will be substituted for us in the
Indentures, with the same effect as if it had been an original party to the Indentures. As a result, the Successor may
exercise our rights and powers under the Indentures, and we will be released from all our liabilities and obligations
under the Indentures and under the debt securities.
For purposes of this covenant, “person” means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof or any other entity.
Events of Default
9
take any comparable action under any foreign laws relating to insolvency;
•
consent to the filing of such petition or the appointment of or taking possession by a custodian; or
•
file a petition in bankruptcy or answer or consent seeking reorganization or relief;
•
make a general assignment for the benefit of our creditors;
•
consent to the appointment of a custodian of us or for all or substantially all of our property;
•
consent to the entry of an order for relief against us in an involuntary case or proceeding;
•
commence a voluntary case or proceeding;
•
3
(3) default in the performance, or breach, of any covenant or agreement of ours in the applicable Indenture
with respect to the debt securities of such series (other than a covenant or agreement, a default in the
performance of which or a breach of which is elsewhere in the applicable Indenture specifically dealt
with or that has expressly been included in the applicable Indenture solely for the benefit of a series of
debt securities other than such series), which continues for a period of 90 days after written notice to us
by the trustee or to us and the trustee by the holders of, in the case of the 2013 Indenture, at least 25%
in aggregate principal amount of the outstanding debt securities of that series, and in the case of the
2018 Indenture, at least 33% in aggregate principal amount of the outstanding debt securities of that
series;
(2) default in the payment of principal of or premium, if any, on any debt securities of such series when it
becomes due and payable at its stated maturity, upon optional redemption, upon declaration or
otherwise;
in the case of the 2013 Indenture, the trustee receives from us an officers' certificate and an opinion of
counsel that the transaction and such supplemental indenture, as the case may be, complies with the
applicable provisions of the 2013 Indenture.
We may redeem the 0.000% 2025 Notes, the 0.875% 2025 Notes, the 1.375% 2029 Notes and the 2031
Notes at our option, at any time in whole or from time to time in part, prior to the applicable Par Call Date at a
redemption price equal to the greater of:
immediately after giving effect to such transaction, no default or event of default under the applicable
Indenture has occurred and is continuing; and
8
100% of the principal amount of the Notes to be redeemed; or
the sum of the present values of the remaining scheduled payments of principal and interest thereon
assuming that the Notes matured on the applicable Par Call Date (not including any portion of such
payments of interest accrued as of the date of redemption), discounted to the date of redemption on an
annual basis (ACTUAL/ACTUAL (ICMA)) at the applicable Comparable Government Bond Rate (as
defined below), plus 10 basis points in the case of the 0.000% 2025 Notes, plus 15 basis points in the
case of the 0.875% 2025 Notes and the 2031 Notes, and 20 basis points in the case of the 2029 Notes.
"Par Call Date" means (i) with respect to the 0.000% 2025 Notes, August 15, 2025 (three months prior to the
maturity date of the 0.000% 2025 Notes), (ii) with respect to the 0.875% 2025 Notes, February 24, 2025 (three
months prior to the maturity date of the 0.875% 2025 Notes), (iii) with respect to the 1.375% 2029 Notes, February
24, 2029 (three months prior to the maturity date of 1.375% 2029 Notes) and (iv) with respect to the 2031 Notes,
August 15, 2031 (three months prior to the maturity of the 2031 Notes).
If any of the 0.000% 2025 Notes, the 0.875% 2025 Notes, the 1.375% 2029 Notes or the 2031 Notes are
redeemed on or after the applicable Par Call Date, the redemption price for such Notes will equal 100% of the
principal amount of the Notes being redeemed.
In each case upon redemption of the Notes, we will pay accrued and unpaid interest on the principal amount
being redeemed to, but excluding, the date of redemption.
7
Installments of interest on Notes being redeemed that are due and payable on interest payment dates falling
on or prior to a redemption date shall be payable on the interest payment date to the holders as of the close of
business on the relevant regular record date according to the Notes and the applicable Indenture.
"Comparable Government Bond" means, in relation to any Comparable Government Bond Rate calculation
for the 2024 Notes, the 2026 Notes and the 2027 Notes, at the discretion of an independent investment bank selected
by us, a German government bond whose maturity is closest to the maturity of the Notes being redeemed, or if such
independent investment bank in its discretion determines that such similar bond is not in issue, such other German
government bond as such independent investment bank may, with the advice of three brokers of, and/or market
makers in, German government bonds selected by us, determine to be appropriate for determining the Comparable
Government Bond Rate.
"Comparable Government Bond" means, in relation to any Comparable Government Bond Rate calculation
for the 3.050% 2029 Notes and the 2042 Notes, at the discretion of an independent investment bank selected by us,
a United Kingdom government bond whose maturity is closest to the maturity of the Notes being redeemed, or if such
independent investment bank in its discretion determines that such similar bond is not in issue, such other United
Kingdom government bond as such independent investment bank may, with the advice of three brokers of, and/or
market makers in, United Kingdom government bonds selected by us, determine to be appropriate for determining the
Comparable Government Bond Rate.
"Comparable Government Bond" means, in relation to any Comparable Government Bond Rate calculation
for the 0.000% 2025 Notes, the 0.875% 2025 Notes, the 1.375% 2029 Notes and the 2031 Notes, at the discretion of
an independent investment bank selected by us, a German government bond whose maturity is closest to the
applicable Par Call Date of the Notes being redeemed, or if such independent investment bank in its discretion
determines that such similar bond is not in issue, such other German government bond as such independent
investment bank may, with the advice of three brokers of, and/or market makers in, German government bonds
selected by us, determine to be appropriate for determining the Comparable Government Bond Rate.
"Comparable Government Bond Rate” means the price, expressed as a percentage (rounded to three
decimal places, with 0.0005 being rounded upwards), at which the gross redemption yield on the Notes, if they were
to be purchased at such price on the third business day prior to the date fixed for redemption, would be equal to the
gross redemption yield on such business day of the Comparable Government Bond on the basis of the middle market
price of the Comparable Government Bond prevailing at 11:00 a.m. (London time) on such business day as
determined by an independent investment bank selected by us.
Covenants
The Indentures set forth limited covenants that apply to the Notes. However, these covenants do not, among
other things:
•
•
limit the amount of indebtedness or lease obligations that may be incurred by us and our subsidiaries;
limit our ability or that of our subsidiaries to issue, assume or guarantee debt secured by liens; or
restrict us from paying dividends or making distributions on our capital stock or purchasing or redeeming
our capital stock.
Consolidation, Merger and Sale of Assets
The Indentures provide that we may consolidate with or merge with or into any other person, and may sell,
transfer, or lease or convey all or substantially all of our properties and assets to another person; provided that the
following conditions are satisfied:
we are the continuing entity, or the resulting, surviving or transferee person (the "Successor”) is a
person (if such person is not a corporation, then the Successor will include a corporate co-issuer of the
debt securities) organized and existing under the laws of the United States of America, any state thereof
or the District of Columbia and the Successor (if not us) will expressly assume, by supplemental
indenture, all of our obligations under the debt securities and the applicable Indenture and, for each
security that by its terms provides for conversion, provide for the right to convert such security in
accordance with its terms;
•
We issued €1,000,000,000 aggregate principal amount of the 2027 Notes on September 17, 2015. The
maturity date of the 2027 Notes is September 17, 2027, and interest at a rate of 2.000% per annum is paid annually
on September 17 of each year, beginning on September 17, 2016, and on the maturity date. As of October 20, 2023,
€1,000,000,000 aggregate principal amount of the 2027 Notes was outstanding.
As of September 30, 2023, Apple Inc. ("Apple" or the "Company") had ten classes of securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"): (i) Common Stock,
$0.00001 par value per share ("Common Stock"); (ii) 1.375% Notes due 2024 (the "2024 Notes"); (iii) 0.000% Notes
due 2025 (the "0.000% 2025 Notes"); (iv) 0.875% Notes due 2025 (the "0.875% 2025 Notes"); (v) 1.625% Notes due
2026 (the "2026 Notes"); (vi) 2.000% Notes due 2027 (the "2027 Notes"); (vii) 1.375% Notes due 2029 (the "1.375%
2029 Notes"); (viii) 3.050% Notes due 2029 (the "3.050% 2029 Notes"); (ix) 0.500% Notes due 2031 (the "2031
Notes"); and (x) 3.600% Notes due 2042 (the "2042 Notes," and together with the 2024 Notes, the 0.000% 2025
Notes, the 0.875% 2025 Notes, the 2026 Notes, the 2027 Notes, the 1.375% 2029 Notes, the 3.050% 2029 Notes,
and the 2031 Notes, the “Notes”). Each of the Company's securities registered under Section 12 of the Exchange Act
are listed on The Nasdaq Stock Market LLC.
We issued €1,400,000,000 aggregate principal amount of the 2026 Notes on November 10, 2014. The
maturity date of the 2026 Notes is November 10, 2026, and interest at a rate of 1.625% per annum is paid annually
on November 10 of each year, beginning on November 10, 2015, and on the maturity date. As of October 20, 2023,
€1,400,000,000 aggregate principal amount of the 2026 Notes was outstanding.
November 2, 2023
/s/ Al Gore
Director
AL GORE
/s/ Alex Gorsky
Director
ALEX GORSKY
/s/ Andrea Jung
ANDREA JUNG
/s/ Arthur D. Levinson
ARTHUR D. LEVINSON
Director
November 2, 2023
November 2, 2023
November 2, 2023
November 2, 2023
Director and Chair of the Board
/s/ Monica Lozano
Director
MONICA LOZANO
/s/ Ronald D. Sugar
Director
RONALD D. SUGAR
/s/ Susan L. Wagner
SUSAN L. WAGNER
Director
November 2, 2023
Apple Inc. | 2023 Form 10-K | 58
Director
November 2, 2023
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 2, 2023
Apple Inc.
By:
/s/ Luca Maestri
Luca Maestri
Senior Vice President,
Chief Financial Officer
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Timothy D. Cook and Luca Maestri, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him
or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated:
Name
/s/ Timothy D. Cook
TIMOTHY D. COOK
/s/ Luca Maestri
LUCA MAESTRI
/s/ Chris Kondo
CHRIS KONDO
/s/ James A. Bell
JAMES A. BELL
Title
Date
Chief Executive Officer and Director
November 2, 2023
(Principal Executive Officer)
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
Senior Director of Corporate Accounting
(Principal Accounting Officer)
November 2, 2023
November 2, 2023
November 2, 2023
•
•
provide that, except for a vacancy caused by the removal of a director as provided in the Bylaws, a
vacancy on the Company's Board of Directors may be filled by a person selected by a majority of the
remaining directors then in office, whether or not less than a quorum, or by a sole remaining director;
provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate
candidates for election as directors at a meeting of shareholders must provide notice in writing in a
timely manner, and also specify requirements as to the form and content of a shareholder's notice,
including with respect to a shareholder's notice under Rule 14a-19 of the Exchange Act;
provide that a shareholder, or group of up to 20 shareholders, that has owned continuously for at least
three years shares of Common Stock representing an aggregate of at least 3% of the Company's
outstanding shares of Common Stock, may nominate and include in the Company's proxy materials
director nominees constituting up to 20% of the Company's Board of Directors, provided that the
shareholder(s) and nominee(s) satisfy the requirements in the Bylaws;
do not provide for cumulative voting rights for the election of directors; and
provide that special meetings of the shareholders may only be called by (i) the Board of Directors, the
Chair of the Board of Directors or the Chief Executive Officer or (ii) one or more holders of shares
entitled to cast not less than ten percent (10%) of the votes on the record date established pursuant to
the Company's Bylaws, provided that the shareholder(s) satisfy requirements in the Bylaws.
In addition, as a California corporation, the Company is subject to the provisions of Section 1203 of the
California General Corporation Law, which requires it to provide a fairness opinion to its shareholders in connection
with their consideration of any proposed "interested party" reorganization transaction.
Listing
"AAPL."
The Company's Common Stock is listed on The Nasdaq Stock Market LLC under the trading symbol
2
DESCRIPTION OF DEBT SECURITIES
The following description of the Notes is a summary and does not purport to be complete. This description is
qualified in its entirety by reference, as applicable, to the Indenture, dated as of April 29, 2013, between Apple Inc.
and The Bank of New York Mellon Trust Company, N.A., as trustee (the "2013 Indenture") and the Indenture, dated
as of November 5, 2018, between Apple Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee (the
❝2018 Indenture," and together with the 2013 Indenture, the "Indentures"). References in this section to the
"Company,” “us,” “we” and “our” are solely to Apple Inc. and not to any of its subsidiaries, unless the context requires
otherwise.
The Notes
Each of the Notes were issued under the applicable Indenture, which provides that debt securities may be
issued under such Indenture from time to time in one or more series. The Indentures and the Notes are governed by,
and construed in accordance with, the laws of the State of New York. The Indentures do not limit the amount of debt
securities that we may issue thereunder. We may, without the consent of the holders of the debt securities of any
series, issue additional debt securities ranking equally with, and otherwise similar in all respects to, the debt securities
of the series (except for the date of issuance, the date interest begins to accrue and, in certain circumstances, the
first interest payment date) so that those additional debt securities will be consolidated and form a single series with
the debt securities of the series previously offered and sold; provided, however, that any additional debt securities will
have a separate ISIN number unless certain conditions are met.
The 2024 Notes
We issued €1,000,000,000 aggregate principal amount of the 2024 Notes on September 17, 2015. The
maturity date of the 2024 Notes is January 17, 2024, and interest at a rate of 1.375% per annum is paid annually on
January 17 of each year, beginning on January 17, 2016, and on the maturity date. As of October 20, 2023,
€1,000,000,000 aggregate principal amount of the 2024 Notes was outstanding.
The 0.000% 2025 Notes
We issued €1,000,000,000 aggregate principal amount of the 0.000% 2025 Notes on November 15, 2019.
The maturity date of the 0.000% 2025 Notes is November 15, 2025, and interest at a rate of 0.000% per annum is
paid annually on November 15 of each year, beginning on November 15, 2020, and on the maturity date. As of
October 20, 2023, €1,000,000,000 aggregate principal amount of the 0.000% 2025 Notes was outstanding.
The 0.875% 2025 Notes
We issued €1,250,000,000 aggregate principal amount of the 0.875% 2025 Notes on May 24, 2017. The
maturity date of the 0.875% 2025 Notes is May 24, 2025, and interest at a rate of 0.875% per annum is paid annually
on May 24 of each year, beginning on May 24, 2018, and on the maturity date. As of October 20, 2023,
€1,250,000,000 aggregate principal amount of the 0.875% 2025 Notes was outstanding.
The 2026 Notes
•
Provisions of the Articles and Bylaws may delay or discourage transactions involving an actual or potential
change in control of the Company or change in its management, including transactions in which shareholders might
otherwise receive a premium for their shares, or transactions that its shareholders might otherwise deem to be in their
best interests. Among other things, the Articles and Bylaws:
Anti-Takeover Provisions of the Articles, Bylaws and California Law
Common Stock has no preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares of Common Stock.
Exhibit 4.1
DESCRIPTION OF THE REGISTRANT'S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
(1) default in the payment of any installment of interest on any debt securities of such series for 30 days
after becoming due;
DESCRIPTION OF COMMON STOCK
The following is a description of the rights of Common Stock and related provisions of the Company's
Restated Articles of Incorporation (the "Articles”) and Amended and Restated Bylaws (the "Bylaws") and applicable
California law. This description is qualified in its entirety by, and should be read in conjunction with, the Articles,
Bylaws and applicable California law.
Authorized Capital Stock
The Company's authorized capital stock consists of 50,400,000,000 shares of Common Stock.
Common Stock
Fully Paid and Nonassessable
All of the outstanding shares of the Company's Common Stock are fully paid and nonassessable.
The 2027 Notes
Voting Rights
Except as described below or as required by law, all matters to be voted on by shareholders must be
approved by the affirmative vote of (i) a majority of the shares present or represented by proxy and voting and (ii) a
majority of the shares required to constitute a quorum.
In an election of directors where the number of nominees exceeds the number of directors to be elected, the
candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them up to the
number of directors to be elected by such shares will be elected.
The Company's entire Board of Directors or any individual director may be removed without cause by an
affirmative vote of a majority of the outstanding shares entitled to vote, subject to the provisions of the Company's
Bylaws.
Vacancies created by the removal of a director must be filled only by approval of the shareholders, or by the
unanimous written consent of all shares entitled to vote. The shareholders may elect a director at any time to fill a
vacancy not filled by the directors, but any such election by written consent, other than to fill a vacancy created by
removal, requires the consent of a majority of the outstanding shares entitled to vote thereon.
An amendment of the Bylaws or the Articles may be adopted by the vote of the majority of the outstanding
shares entitled to vote. Any amendment of the Bylaws specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable board or vice versa may only be adopted by the
shareholders; provided, however, that an amendment of the Bylaws or the Articles reducing the fixed number or the
minimum number of directors to less than five cannot be adopted if the votes cast against its adoption are equal to
more than 16 2/3% of the outstanding shares entitled to vote.
Any shareholders' meeting may be adjourned from time to time by the vote of a majority of the shares
present in person or represented by proxy.
Dividends
The holders of shares of Common Stock are entitled to receive such dividends, if any, as may be declared
from time to time by the Company's Board of Directors in its discretion from funds legally available therefor.
Right to Receive Liquidation Distributions
Upon liquidation, dissolution or winding-up, the holders of shares of Common Stock are entitled to receive
pro rata all assets remaining available for distribution to holders of such shares.
No Preemptive or Similar Rights
The holders of shares of Common Stock are entitled to one vote per share on all matters to be voted on by
such holders. Holders of shares of Common Stock are not entitled to cumulative voting rights.
Each of the following events are defined in the Indentures as an “event of default" (whatever the reason for
such event of default and whether or not it will be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or
governmental body) with respect to the debt securities of any series:
(3) the trustee has been offered indemnity reasonably satisfactory to it against its costs, expenses and
liabilities in complying with such request;
•
(1)
(2)
(3)
(4)
(5)
56
(6)
(7)
Registration Statement (Form S-3 ASR No. 333-260578) of Apple Inc.,
Registration Statement (Form S-8 No. 333-264555) pertaining to Apple Inc. Deferred Compensation Plan,
Registration Statement (Form S-8 No. 333-165214) pertaining to Apple Inc. 2014 Employee Stock Plan and Apple Inc.
2022 Employee Stock Plan,
Exhibit 23.1
Registration Statement (Form S-8 No. 333-195509) pertaining to Apple Inc. 2014 Employee Stock Plan and Apple Inc.
2022 Employee Stock Plan,
of our reports dated November 2, 2023 with respect to the consolidated financial statements of Apple Inc., and the effectiveness
of internal control over financial reporting of Apple Inc., included in this Annual Report on Form 10-K for the year ended
September 30, 2023.
/s/ Ernst & Young LLP
San Jose, California
November 2, 2023
I, Timothy D. Cook, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of Apple Inc.;
Exhibit 31.1
2.
3.
4.
Registration Statement (Form S-8 No. 333-226986) pertaining to Apple Inc. Deferred Compensation Plan,
Registration Statement (Form S-8 No. 333-203698) pertaining to Apple Inc. Employee Stock Purchase Plan, and
Registration Statement (Form S-8 No. 333-60455) pertaining to Apple Inc. Non-Employee Director Stock Plan;
5.
We consent to the incorporation by reference in the following Registration Statements:
Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Apple Inc. are omitted because,
considered in the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report.
Apple South Asia (Thailand) Limited
Apple Vietnam Limited Liability Company
Braeburn Capital, Inc.
iTunes K.K.
Subsidiaries of
Apple Inc.*
Exhibit 21.1
Jurisdiction
of Incorporation
Hong Kong
Delaware, U.S.
Canada
China
Ireland
Consent of Independent Registered Public Accounting Firm
India
Japan
South Korea
Ireland
Ireland
Mexico
Australia
Ireland
Thailand
Vietnam
Nevada, U.S.
Japan
Arizona, U.S.
Apple Sales International Limited
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the Registrant's internal control over financial reporting.
Date: November 2, 2023
By:
/s/ Luca Maestri
Luca Maestri
Senior Vice President,
Chief Financial Officer
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons
performing the equivalent functions):
Exhibit 32.1
Date: November 2, 2023
By:
/s/ Timothy D. Cook
Timothy D. Cook
Chief Executive Officer
I, Luca Maestri, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Apple Inc. on Form 10-K for the fiscal year ended September 30, 2023
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information
contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Apple Inc.
at the dates and for the periods indicated.
Date: November 2, 2023
By:
/s/ Luca Maestri
Luca Maestri
Senior Vice President,
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Apple Inc. and will be retained by Apple
Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
I, Timothy D. Cook, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Apple Inc. on Form 10-K for the fiscal year ended September 30, 2023
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information
contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Apple Inc.
at the dates and for the periods indicated.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods
presented in this report;
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control
over financial reporting; and
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control
over financial reporting; and
The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the Registrant's internal control over financial reporting.
Date: November 2, 2023
By:
/s/Timothy D. Cook
Timothy D. Cook
Chief Executive Officer
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
I, Luca Maestri, certify that:
1.
I have reviewed this annual report on Form 10-K of Apple Inc.;
Exhibit 31.2
2.
3.
4.
5.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods
presented in this report;
The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
CERTIFICATION
(5) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
Apple Pty Limited
Apple Operations Limited
•
change the stated maturity of the principal of, or installment of interest on, any Note;
reduce the principal amount of any Note or reduce the amount of the principal of any Note which would
be due and payable upon a declaration of acceleration of the maturity thereof or reduce the rate of
interest on any Note;
reduce any premium payable on the redemption of any Note or change the date on which any Note may
or must be redeemed (in the case of the 2018 Indenture, it being understood that a change to any
notice requirement with respect to such date shall not be deemed to be a change of such date);
change the coin or currency in which the principal of, premium, if any, or interest on any Note is
payable;
impair the right of any holder to institute suit for the enforcement of any payment on or after the stated
maturity of any Note (or, in the case of redemption, on or after the redemption date);
reduce the percentage in principal amount of the outstanding Notes, the consent of whose holders is
required in order to take certain actions;
reduce the requirements for quorum or voting by holders of Notes in the applicable Indenture or the
Note;
modify any of the provisions in the applicable Indenture regarding the waiver of past defaults and the
waiver of certain covenants by the holders of Notes except to increase any percentage vote required or
to provide that certain other provisions of the applicable Indenture cannot be modified or waived without
the consent of the holder of each Notes affected thereby;
make any change that adversely affects the right to convert or exchange any debt security or decreases
the conversion or exchange rate or increases the conversion price of any convertible or exchangeable
debt security, unless such decrease or increase is permitted by the terms of the debt securities; or
•
•
modify any of the above provisions.
We and the trustee may, without the consent of any holders, modify or amend the terms of the Indentures
and any series of Notes with respect to the following:
•
•
•
•
•
to add to our covenants for the benefit of holders of all or any series of the Notes or to surrender any
right or power conferred upon us;
to evidence the succession of another person to, and the assumption by the successor of our
covenants, agreements and obligations under, the applicable Indenture pursuant to the covenant
described above under the caption "Covenants-Consolidation, Merger and Sale of Assets";
to add any additional events of default for the benefit of holders of all or any series of the Notes;
to add one or more guarantees, and in the case of the 2018 Indenture, co-obligors, for the benefit of
holders of the Notes;
to secure the Notes pursuant to the covenants of the Indenture;
11
•
•
•
is for relief against us in an involuntary case, or adjudicates us insolvent or bankrupt;
•
appoints a custodian of us or for all or substantially all of our property; or
•
orders the winding-up or liquidation of us (or any similar relief is granted under any foreign laws);
and the order or decree remains unstayed and in effect for 90 days (or, in the case of the 2018
Indenture, 90 consecutive days); or
(6) any other event of default provided with respect to debt securities of such series occurs.
"Bankruptcy Law" means Title 11, United States Code or any similar federal or state or foreign law for the
relief of debtors. "Custodian” means any custodian, receiver, trustee, assignee, liquidator or other similar official
under any Bankruptcy Law.
If an event of default with respect to debt securities of any series (other than an event of default relating to
certain events of bankruptcy, insolvency, or reorganization of us) occurs and is continuing, the trustee by notice to us,
or the holders of, in the case of the 2013 Indenture, at least 25% in aggregate principal amount of the outstanding
debt securities of such series, and in the case of the 2018 Indenture, at least 33% in aggregate principal amount of
the outstanding debt securities of such series, by notice to us and the trustee, may, and the trustee at the request of
these holders will, declare the principal of and premium, if any, and accrued and unpaid interest on all the debt
securities of such series to be due and payable. Upon such a declaration, such principal, premium and accrued and
unpaid interest will be due and payable immediately. If an event of default relating to certain events of bankruptcy,
insolvency, or reorganization of us occurs and is continuing, the principal of and premium, if any, and accrued and
unpaid interest on the debt securities of such series will become and be immediately due and payable without any
declaration or other act on the part of the trustee or any holders.
The holders of not less than a majority in aggregate principal amount of the outstanding debt securities of
any series may rescind a declaration of acceleration and its consequences, if we have deposited certain sums with
the trustee and all events of default with respect to the debt securities of such series, other than the non-payment of
the principal or interest which have become due solely by such acceleration, have been cured or waived, as provided
in the Indentures.
An event of default for a particular series of debt securities does not necessarily constitute an event of
default for any other series of debt securities issued under the Indentures.
•
We are required to furnish the trustee annually within 120 days after the end of our fiscal year a statement
by one of our officers to the effect that, to the best knowledge of such officer, we are not in default in the fulfillment of
any of our obligations under the applicable Indenture or, if there has been a default in the fulfillment of
obligation, specifying each such default and the nature and status thereof.
No holder of any debt securities of any series will have any right to institute any judicial or other proceeding
with respect to the applicable Indenture, or for the appointment of a receiver or trustee, or for any other remedy
unless:
(1) an event of default has occurred and is continuing and such holder has given the trustee prior written
notice of such continuing event of default with respect to the debt securities of such series;
(2) in the case of the 2013 Indenture, the holders of not less than 25% of the aggregate principal amount of
the outstanding debt securities of such series, and in the case of the 2018 Indenture, the holders of not
less than 33% of the aggregate principal amount of the outstanding debt securities of such series have
requested the trustee to institute proceedings in respect of such event of default;
(4) the trustee has failed to institute proceedings 60 days after the receipt of such notice, request and offer
of indemnity; and
10
(5) no direction inconsistent with such written request has been given for 60 days by the holders of a
majority in aggregate principal amount of the outstanding debt securities of such series.
The holders of a majority in aggregate principal amount of outstanding debt securities of a series will have
the right, subject to certain limitations, to direct the time, method and place of conducting any proceeding for any
remedy available to the trustee with respect to the debt securities of that series or exercising any trust or power
conferred to the trustee, and to waive certain defaults. Each of the Indentures provides that if an event of default
occurs and is continuing, the trustee will exercise such of its rights and powers under such Indenture, and use the
same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in
the conduct of such person's own affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the applicable Indenture at the request of any of the holders of the debt
securities of a series unless they will have offered to the trustee security or indemnity satisfactory to the trustee
against the costs, expenses and liabilities which might be incurred by it in compliance with such request.
Notwithstanding the foregoing, the holder of any debt security will have an absolute and unconditional right
to receive payment of the principal of and premium, if any, and interest on that debt security on or after the due dates
expressed in that debt security and to institute suit for the enforcement of payment.
Modification and Waivers
Modification and amendments of the Indentures and the Notes may be made by us and the trustee with the
consent of the holders of not less than a majority in aggregate principal amount of the outstanding series of Notes
affected thereby; provided, however, that no such modification or amendment may, without the consent of the holder
of each outstanding Note of that series affected thereby:
any such
Apple Operations Mexico, S.A. de C.V.
to add or appoint a successor or separate trustee or other agent;
•
The Notes were issued in book-entry form and are represented by global notes deposited with, or on behalf
of, a common depositary on behalf of Euroclear and Clearstream, and are registered in the name of the common
depositary or its nominee. Except as described herein, certificated notes will not be issued in exchange for beneficial
interests in the global notes.
Certificated Notes
Subject to certain conditions, the Notes represented by the global notes are exchangeable for certificated
notes in definitive form of like tenor, in minimum denominations of €100,000 principal amount and integral multiples of
€1,000 in excess thereof in the case of the 2024 Notes, the 0.000% 2025 Notes, the 0.875% 2025 Notes, the 2026
Notes, the 2027 Notes, the 1.375% 2029 Notes and the 2031 Notes, and in minimum denominations of £100,000
principal amount and integral multiples of £1,000 in excess thereof in the case of the 3.050% 2029 Notes and the
2042 Notes, if:
1.
2.
3.
the common depositary notifies us that it is unwilling or unable to continue as depositary or if the
common depositary ceases to be eligible under the applicable Indenture and we do not appoint a
successor depository within 90 days;
we determine that the Notes will no longer be represented by global securities and execute and deliver
to the trustee an order to that effect; or
an event of default with respect to the Notes will have occurred and be continuing.
Any Note that is exchangeable as above is exchangeable for certificated notes issuable in authorized
denominations and registered in such names as the common depositary shall direct. Subject to the foregoing, a
global note is not exchangeable, except for a global note of the same aggregate denomination to be registered in the
name of the common depositary or its nominee.
The Trustee for the Notes
Book-Entry and Settlement
The Bank of New York Mellon Trust Company, N.A. is the trustee under the Indentures. We have
commercial deposits and custodial arrangements with The Bank of New York Mellon Trust Company, N.A. and its
affiliates ("BNYM"). We may enter into similar or other banking relationships with BNYM in the future in the normal
course of business. In addition, BNYM acts as trustee and as paying agent with respect to other debt securities
issued by us, and may do so for future issuances of debt securities by us as well.
14
Apple Asia Limited
Apple Asia LLC
Apple Canada Inc.
Apple Computer Trading (Shanghai) Co., Ltd.
Apple Distribution International Limited
Apple India Private Limited
Apple Insurance Company, Inc.
Apple Japan, Inc.
Apple Korea Limited
Apple Operations International Limited
±
•
We may exercise our legal defeasance option notwithstanding our prior exercise of our covenant
defeasance option.
13
to provide for the issuance of additional debt securities of any series;
to establish the form or terms of the debt securities of any series as permitted by the Indenture;
•
to comply with the rules of any applicable securities depository;
•
•
•
•
•
to provide for uncertificated Notes in addition to or in place of certificated Notes;
in the case of the 2013 Indenture, to add to, change or eliminate any of the provisions of the 2013
Indenture in respect of one or more series of debt securities; provided that any such addition, change or
elimination (a) shall neither (1) apply to any debt security of any series created prior to the execution of
such supplemental indenture and entitled to the benefit of such provision nor (2) modify the rights of the
holder of any such debt security with respect to such provision or (b) shall become effective only when
there is no debt security described in clause (a)(1) outstanding;
We will be required to deliver to the trustee an opinion of counsel that the deposit and related defeasance
will not cause the holders and beneficial owners of the Notes of that series to recognize income, gain or loss for
federal income tax purposes. If we elect legal defeasance, that opinion of counsel must be based upon a ruling from
the U.S. Internal Revenue Service or a change in law to that effect.
in the case of the 2018 Indenture, to add to, change or eliminate any of the provisions of the 2018
Indenture in respect of one or more series of debt securities; provided that any such addition, change or
elimination shall become effective only when there is no outstanding security of any series created prior
to the execution of such supplemental indenture that is entitled to the benefit of such provision and as to
which such supplemental indenture would apply;
to change any other provision; provided that the change does not adversely affect the interests of the
holders of debt securities of, in the case of the 2013 Indenture any series, and in the case of the 2018
Indenture, any outstanding series, in any material respect;
to supplement any of the provisions of the applicable Indenture to such extent as shall be necessary to
permit or facilitate the defeasance and discharge of any series of Notes pursuant to the Indenture;
provided that any such action shall not adversely affect the interests of the holders of Notes of such
series or any other series of debt securities in any material respect;
to add to, change or eliminate any of the provisions of the applicable Indenture as shall be necessary or
desirable in accordance with any amendments to the Trust Indenture Act of 1939, as amended, and in
the case of the 2013 Indenture, provided that such action does not adversely affect the rights or
interests of any holder of debt securities in any material respect.
12
The holders of at least a majority in aggregate principal amount of the outstanding Notes of any series may,
on behalf of the holders of all Notes of that series, waive compliance by us with certain restrictive provisions of the
Indentures. The holders of not less than a majority in aggregate principal amount of the outstanding Notes of a series
may, on behalf of the holders of all Notes of that series, waive any past default and its consequences under the
applicable Indenture with respect to the Notes of that series, except a default (1) in the payment of principal or
premium, if any, or interest on Notes of that series or (2) in respect of a covenant or provision of the applicable
Indenture that cannot be modified or amended without the consent of the holder of each Note of that series. Upon any
such waiver, such default will cease to exist, and any event of default arising therefrom will be deemed to have been
cured, for every purpose of the Indenture; however, no such waiver will extend to any subsequent or other default or
event of default or impair any rights consequent thereon.
Discharge, Defeasance and Covenant Defeasance
We may discharge certain obligations to holders of the Notes of a series that have not already been
delivered to the trustee for cancellation and that either have become due and payable or will become due and
payable within one year (or scheduled for redemption within one year) by depositing with the trustee, in trust, funds in
U.S. dollars in an amount sufficient to pay the entire indebtedness including, but not limited to, the principal and
premium, if any, and interest to the date of such deposit (if due and payable) or to the maturity thereof or the
redemption date of the Notes of that series, as the case may be. We may direct the trustee to invest such funds in
U.S. Treasury securities with a maturity of one year or less or in a money market fund that invests solely in short-term
U.S. Treasury securities.
The Indentures provide that we may elect either (1) to defease and be discharged from any and all
obligations with respect to the Notes of a series (except for, among other things, obligations to register the transfer or
exchange of the Notes, to replace temporary or mutilated, destroyed, lost or stolen Notes, to maintain an office or
agency with respect to the Notes and to hold moneys for payment in trust) (“legal defeasance") or (2) to be released
from our obligations to comply with the restrictive covenants under the applicable Indenture, and any omission to
comply with such obligations will not constitute a default or an event of default with respect to the Notes of a series
and clauses (3) and (6) under the caption "Events of Default" above will no longer be applied ("covenant
defeasance"). Legal defeasance or covenant defeasance, as the case may be, will be conditioned upon, among other
things, the irrevocable deposit by us with the trustee, in trust, of an amount in U.S. dollars, or U.S. government
obligations (as such term is modified below), or both, applicable to the Notes of that series which through the
scheduled payment of principal and interest in accordance with their terms will provide money in an amount sufficient
to pay the principal or premium, if any, and interest on the Notes on the scheduled due dates therefor.
If we effect covenant defeasance with respect to the Notes of any series, the amount in U.S. dollars, or U.S.
government obligations (as such term is modified below), or both, on deposit with the trustee will be sufficient, in the
opinion of a nationally recognized firm of independent accountants, to pay amounts due on the Notes of that series at
the time of the stated maturity but may not be sufficient to pay amounts due on the Notes of that series at the time of
the acceleration resulting from such event of default. However, we would remain liable to make payment of such
amounts due at the time of acceleration.
With respect to the 2024 Notes, the 0.000% 2025 Notes, the 0.875% 2025 Notes, the 2026 Notes, the 2027
Notes, the 1.375% 2029 Notes and the 2031 Notes, the term "U.S. government obligations" shall instead mean (x)
any security that is (i) a direct obligation of the German government or (ii) an obligation of a person controlled or
supervised by and acting as an agency or instrumentality of the German government the payment of which is fully
and unconditionally guaranteed by the German government or the central bank of the German government, which, in
either case (x)(i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) certificates, depositary
receipts or other instruments which evidence a direct ownership interest in obligations described in clause (x)(i) or
(x)(ii) above or in any specific principal or interest payments due in respect thereof.
With respect to the 3.050% 2029 Notes and the 2042 Notes, the term “U.S. government obligations❞ shall
instead mean (x) any security that is (i) a direct obligation of the United Kingdom government or (ii) an obligation of a
person controlled or supervised by and acting as an agency or instrumentality of the United Kingdom government the
payment of which is fully and unconditionally guaranteed by the United Kingdom government or the central bank of
the United Kingdom government, which, in either case (x)(i) or (ii), is not callable or redeemable at the option of the
issuer thereof, and (y) certificates, depositary receipts or other instruments which evidence a direct ownership interest
in obligations described in clause (x)(i) or (x)(ii) above or in any specific principal or interest payments due in respect
thereof.
to cure any ambiguity, omission, defect or inconsistency;
to comply with the rules or regulations of any securities exchange or automated quotation system on
which any of the Notes may be listed or traded; and