APPLE INC.
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q")
contain forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve risks and uncertainties.
Forward-looking statements provide current expectations of future events based
on certain assumptions and include any statement that does not directly relate
to any historical or current fact. Forward-looking statements can also be
identified by words such as "future," "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "will," "would," "could," "can,"
"may," and similar terms. Forward-looking statements are not guarantees of
future performance and the Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed in Part
I, Item 1A of the Company's Annual Report on Form 10-K for the year ended
September 28, 2019 (the "2019 Form 10-K") under the heading "Risk Factors." The
following discussion should be read in conjunction with the 2019 Form 10-K filed
with the U.S. Securities and Exchange Commission (the "SEC") and the condensed
consolidated financial statements and accompanying notes included in Part I,
Item 1 of this Form 10-Q. 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. The Company assumes no
obligation to revise or update any forward-looking statements for any reason,
except as required by law.
Available Information
The Company's Annual 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 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 at
investor.apple.com/investor-relations/sec-filings/default.aspx when such reports
are available on the SEC's website. 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
Company periodically provides other 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 corporate governance and details related to the Company's annual
meeting of shareholders. The information contained on the websites referenced in
this Form 10-Q is not incorporated by reference into this filing. Further, the
Company's references to website URLs are intended to be inactive textual
references only.
Quarterly Highlights
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 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.
First Quarter Fiscal 2020 Highlights
Total net sales increased 9% or $7.5 billion during the first quarter of 2020
compared to the same quarter in 2019, primarily driven by higher iPhone and
Wearables, Home and Accessories net sales. The weakness in foreign currencies
relative to the U.S. dollar had an unfavorable impact on net sales during the
first quarter of 2020.
During the first quarter of 2020, the Company began shipping AirPods Pro™, the
new 16-inch MacBook Pro® and the updated Mac Pro®. Additionally, the Company
released Apple TV+ as a new service.
The Company repurchased $20.0 billion of its common stock and paid dividends and
dividend equivalents of $3.5 billion during the first quarter of 2020.
Apple Inc. | Q1 2020 Form 10-Q | 24
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Products and Services Performance
The following table shows net sales by category for the three months ended
Three Months Ended
December 28, December 29,
2019 2018 Change
Net sales by category:
iPhone (1) $ 55,957 $ 51,982 8 %
Mac (1) 7,160 7,416 (3 )%
iPad (1) 5,977 6,729 (11 )%
Wearables, Home and Accessories (1)(2) 10,010 7,308 37 %
Services (3) 12,715 10,875 17 %
Total net sales $ 91,819 $ 84,310 9 %
(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.
(2) Wearables, Home and Accessories net sales include sales of AirPods, Apple
TV, Apple Watch, Beats products, HomePod, iPod touch and Apple -branded and
third-party accessories.
(3) Services net sales include sales from the Company's digital content stores
and streaming services, AppleCare, licensing and other services. Services
net sales also include amortization of the deferred value of Maps, Siri,
and free iCloud and Apple TV + services, which are bundled in the sales
price of certain products.
iPhone
iPhone net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to the successful launch of the Company's new iPhone models.Mac Mac net sales decreased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to the timing of the MacBook Air® launch in the first quarter of 2019. iPad iPad net sales decreased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to the timing of the iPad Pro® launch in the first quarter of 2019. Wearables, Home and Accessories Wearables, Home and Accessories net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to higher net sales of Wearables, including AirPods andApple Watch. Services Services net sales increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to higher net sales from AppleCare, theApp Store and licensing.Apple Inc. | Q1 2020 Form 10-Q | 25
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Segment Operating Performance
Three Months Ended
December 28, December 29,
2019 2018 Change
Net sales by reportable segment:
Americas $ 41,367 $ 36,940 12 %
Europe 23,273 20,363 14 %
Greater China 13,578 13,169 3 %
Japan 6,223 6,910 (10 )%
Rest of Asia Pacific 7,378 6,928 6 %
Total net sales $ 91,819 $ 84,310 9 %
Americas
Americas net sales increased during the first quarter of 2020 compared to the
same quarter in 2019 due primarily to higher iPhone and Wearables, Home and
Accessories net sales.
Europe
Europe net sales increased during the first quarter of 2020 compared to the same
quarter in 2019 due primarily to higher iPhone and Wearables, Home and
Accessories net sales. The weakness in foreign currencies relative to the U.S.
dollar had an unfavorable impact on Europe net sales during the first quarter of
2020.
Greater China
Greater China net sales increased during the first quarter of 2020 compared to
the same quarter in 2019 due primarily to higher Wearables, Home and Accessories
net sales. The weakness in foreign currencies relative to the U.S. dollar had an
unfavorable impact on Greater China net sales during the first quarter of 2020.
Japan
Japan net sales decreased during the first quarter of 2020 compared to the same
quarter in 2019 due primarily to lower iPhone net sales, partially offset by
higher Services net sales. The strength of the Japanese Yen relative to the U.S.
dollar had a favorable impact on Japan net sales during the first quarter of
2020.
Rest of Asia Pacific
Rest of Asia Pacific net sales increased during the first quarter of 2020
compared to the same quarter in 2019 due primarily to higher Wearables, Home and
Accessories and Services net sales. The weakness in foreign currencies relative
to the U.S. dollar had an unfavorable impact on Rest of Asia Pacific net sales
during the first quarter of 2020.
Apple Inc. | Q1 2020 Form 10-Q | 26
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Gross Margin Products and Services gross margin and gross margin percentage for the three months endedDecember 28, 2019 andDecember 29, 2018 were as follows (dollars in millions): Three Months Ended December 28, December 29, 2019 2018 Gross margin: Products$ 27,029 $ 25,197 Services 8,188 6,834 Total gross margin$ 35,217 $ 32,031 Gross margin percentage: Products 34.2 % 34.3 % Services 64.4 % 62.8 % Total gross margin percentage 38.4 % 38.0 % Products Gross Margin Products gross margin increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to higher leverage, partially offset by the weakness in foreign currencies relative to theU.S. dollar. Products gross margin percentage during the first quarter of 2020 was relatively flat compared to the same quarter in 2019. Services Gross Margin Services gross margin and Services gross margin percentage increased during the first quarter of 2020 compared to the same quarter in 2019 due primarily to a favorable Services mix and higher leverage, partially offset by higher Services costs. The Company's future gross margins can be impacted by a variety of factors, as discussed in Part I, Item 1A of the 2019 Form 10-K under the heading "Risk Factors". As a result, the Company believes, in general, gross margins will be subject to volatility and remain under downward pressure. Operating Expenses Operating expenses for the three months endedDecember 28, 2019 andDecember 29, 2018 were as follows (dollars in millions): Three Months Ended December 28, December 29, 2019 2018 Research and development$ 4,451 $ 3,902 Percentage of total net sales 5 % 5 % Selling, general and administrative$ 5,197 $ 4,783 Percentage of total net sales 6 % 6 % Total operating expenses$ 9,648 $ 8,685 Percentage of total net sales 11 % 10 % Research and Development The growth in research and development ("R&D") expense during the first quarter of 2020 compared to the same quarter in 2019 was driven primarily by increases in headcount-related expenses. 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. Selling, General and Administrative The growth in selling, general and administrative expense during the first quarter of 2020 compared to the same quarter in 2019 was driven primarily by higher spending on marketing and advertising and increases in headcount-related expenses.Apple Inc. | Q1 2020 Form 10-Q | 27
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Other Income/(Expense), Net
Other income/(expense), net ("OI&E") for the three months ended
Three Months Ended
December 28, December 29,
2019 2018 Change
Interest and dividend income
(785 ) (890 )
Other income, net 89 143
Total other income/(expense), net
The decrease in OI&E during the first quarter of 2020 compared to the same quarter in 2019 was due primarily to lower interest income, partially offset by lower interest expense. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 2.08% and 2.19% in the first quarter of 2020 and 2019, respectively. Provision for Income Taxes Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months endedDecember 28, 2019 andDecember 29, 2018 were as follows (dollars in millions): Three Months Ended December 28, December 29, 2019 2018 Provision for income taxes$ 3,682 $ 3,941 Effective tax rate 14.2 % 16.5 % Statutory federal income tax rate 21 % 21 % The Company's effective tax rate for the first quarter of 2020 was lower than the statutory federal income tax rate due primarily to lower tax rates on foreign earnings, tax benefits from share-based compensation and a one-time adjustment ofU.S. foreign tax credits in response to regulations issued by theU.S. Department of the Treasury inDecember 2019 . The Company's effective tax rate for the first quarter of 2020 was lower compared to the same quarter in 2019 due to a one-time adjustment ofU.S. foreign tax credits. Recent Accounting Pronouncements Financial Instruments InJune 2016 , theFinancial Accounting Standards Board issued Accounting Standards Update 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 on 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.Apple Inc. | Q1 2020 Form 10-Q | 28
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Liquidity and Capital Resources
The following tables present selected financial information and statistics as of
December 28 ,September 28, 2019 2019
Cash, cash equivalents and marketable securities (1)
$ 37,031 $ 37,378 Commercial paper$ 4,990 $ 5,980 Total term debt$ 103,302 $ 102,067 Working capital$ 61,070 $ 57,101 Three Months Ended December 28, December 29, 2019 2018 Cash generated by operating activities$ 30,516 $ 26,690
Cash generated by/(used in) investing activities
$ (25,407 ) $ (13,676 ) (1) As of December 28, 2019 and September 28, 2019, total marketable securities included$19.1 billion and$18.9 billion , respectively, that was restricted from general use, related to the State Aid Decision (refer to Note 5, "Income Taxes" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q) and other agreements. The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, dividends, share repurchases, debt repayments and other liquidity requirements associated with its existing operations over the next 12 months. In connection with the State Aid Decision, as ofDecember 28, 2019 , the adjusted recovery amount of €12.9 billion plus interest of €1.2 billion was funded into escrow, where it will remain restricted from general use pending the conclusion of all appeals. The Company's marketable securities investment portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company's investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. During the three months endedDecember 28, 2019 , cash generated by operating activities of$30.5 billion was a result of$22.2 billion of net income, non-cash adjustments to net income of$4.0 billion and an increase in the net change in operating assets and liabilities of$4.2 billion . Cash used in investing activities of$13.7 billion during the three months endedDecember 28, 2019 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of$10.4 billion and cash used to acquire property, plant and equipment of$2.1 billion . Cash used in financing activities of$25.4 billion during the three months endedDecember 28, 2019 consisted primarily of cash used to repurchase common stock of$20.7 billion , cash used to pay dividends and dividend equivalents of$3.5 billion and cash used to repay term debt of$1.0 billion , partially offset by net proceeds from the issuance of term debt of$2.2 billion . During the three months endedDecember 29, 2018 , cash generated by operating activities of$26.7 billion was a result of$20.0 billion of net income, non-cash adjustments to net income of$5.0 billion and an increase in the net change in operating assets and liabilities of$1.8 billion . Cash generated by investing activities of$5.8 billion during the three months endedDecember 29, 2018 consisted primarily of proceeds from maturities and sales of marketable securities, net of purchases, of$9.8 billion , partially offset by cash used to acquire property, plant and equipment of$3.4 billion . Cash used in financing activities of$13.7 billion during the three months endedDecember 29, 2018 consisted primarily of cash used to repurchase common stock of$8.8 billion and cash used to pay dividends and dividend equivalents of$3.6 billion . Debt 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 ofDecember 28, 2019 , the Company had$5.0 billion of Commercial Paper outstanding, with a weighted-average interest rate of 1.88% and maturities generally less than nine months.Apple Inc. | Q1 2020 Form 10-Q | 29
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As ofDecember 28, 2019 , the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of$103.1 billion (collectively the "Notes"). During the first three months of 2020, the Company issued$2.2 billion and repaid$1.0 billion of 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 foreign currency swaps to manage foreign currency risk on the Notes. Further information regarding the Company's debt issuances and related hedging activity can be found in Part I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 3, "Financial Instruments" and Note 6, "Debt." Capital Return Program OnApril 30, 2019 , the Company announced the Board of Directors increased the current share repurchase program authorization from$100 billion to$175 billion of the Company's common stock, of which$116.1 billion had been utilized as ofDecember 28, 2019 . During the three months endedDecember 28, 2019 , the Company repurchased 70.4 million shares of its common stock for$20.0 billion , including 30.4 million shares initially delivered under a$10.0 billion accelerated share repurchase arrangement ("ASR") datedNovember 2019 . The Company's share repurchase program does not obligate it to acquire any specific number of shares. Under this 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. OnApril 30, 2019 , the Company also announced the Board of Directors raised the Company's quarterly cash dividend from$0.73 to$0.77 per share, beginning with the dividend paid during the third quarter of 2019. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors. Contractual Obligations Leases As ofDecember 28, 2019 , the Company's total fixed lease payment obligations were$12.2 billion , of which$7.2 billion was included in other non-current liabilities in the Company's Condensed Consolidated Balance Sheet. The Company's 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 ofDecember 28, 2019 , the Company expects to pay$30.2 billion under manufacturing-related supplier arrangements, which are primarily noncancelable. Other Purchase Obligations The Company's other purchase obligations consist 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, content creation and other activities. As ofDecember 28, 2019 , the Company had other purchase obligations of$9.0 billion . Deemed Repatriation Tax Payable As ofDecember 28, 2019 , the balance of the deemed repatriation tax payable imposed by theU.S. Tax Cuts and Jobs Act (the "Act") was$28.2 billion , and was included in other non-current liabilities in the Company's Condensed Consolidated Balance Sheet. The Company plans to pay the deemed repatriation tax payable in installments in accordance with the Act. Other Non-Current Liabilities The Company's remaining other non-current liabilities primarily consist of items for which the Company is unable to make a reasonably reliable estimate of the timing or amount of payments.Apple Inc. | Q1 2020 Form 10-Q | 30
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Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity
with
There have been no material changes to the Company's market risk during the first three months of 2020. For a discussion of the Company's exposure to market risk, refer to the Company's market risk disclosures set forth in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of the 2019 Form 10-K. Item 4. 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
Apple Inc. | Q1 2020 Form 10-Q | 31
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