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. For example, statements in this Form 10-Q
regarding the potential future impact of the COVID-19 pandemic 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 the
Company's Annual Report on Form 10-K for the fiscal year ended September 25,
2021 (the "2021 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.
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.
The following discussion should be read in conjunction with the 2021 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.
Available Information
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 corporate governance matters, 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.
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.
Quarterly Highlights
Total net sales increased 2% or$1.5 billion during the third quarter of 2022 compared to the same quarter in 2021, driven primarily by higher net sales of Services and iPhone, partially offset by lower net sales of Mac and Wearables, Home and Accessories. The weakness in foreign currencies relative to theU.S. dollar had an unfavorable impact on all Products and Services net sales during the third quarter of 2022. At the end of the third quarter of 2022, the Company introduced an all-new MacBook Air® and an updated 13-inch MacBook Pro®, both powered by the newApple M2 chip. The Company also announced iOS 16, macOS® Ventura, iPadOS® 16 and watchOS® 9, updates to its operating systems that are expected to be available in the fall of 2022.
The Company repurchased
Apple Inc. | Q3 2022 Form 10-Q | 14 --------------------------------------------------------------------------------
COVID-19
The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantine and shelter-in-place orders. The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. The COVID-19 pandemic and the measures taken by many countries in response have affected and could in the future materially impact the Company's business, results of operations and financial condition. Certain of the Company's outsourcing partners, component suppliers and logistical service providers have experienced disruptions during the COVID-19 pandemic, resulting in supply shortages. Similar disruptions could occur in the future.
Products and Services Performance
The following table shows net sales by category for the three- and nine-month
periods ended
Three Months Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2022 2021 Change 2022 2021 Change
Net sales by category:
iPhone (1) $ 40,665 $ 39,570 3 % $ 162,863 $ 153,105 6 %
Mac (1) 7,382 8,235 (10) % 28,669 26,012 10 %
iPad (1) 7,224 7,368 (2) % 22,118 23,610 (6) %
Wearables, Home and Accessories
(1)(2) 8,084 8,775 (8) % 31,591 29,582 7 %
Services (3) 19,604 17,486 12 % 58,941 50,148 18 %
Total net sales $ 82,959 $ 81,434 2 % $ 304,182 $ 282,457 8 %
(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,
(3)Services net sales include sales from the Company's advertising,
iPhone
iPhone net sales increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to higher net sales from the Company's new iPhone models.
Mac
Mac net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales ofMacBook Air and iMac®, partially offset by higher net sales of MacBook Pro. Year-over-year Mac net sales increased during the first nine months of 2022 due primarily to higher net sales of MacBook Pro, partially offset by lower net sales ofMacBook Air .
iPad
iPad net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of iPad Pro®, partially offset by higher net sales of all other iPad models. Year-over-year iPad net sales decreased during the first nine months of 2022 due primarily to lower net sales of the 10-inch version of iPad and iPad Air®, partially offset by higher net sales of iPad mini®.
Wearables, Home and Accessories
Wearables, Home and Accessories net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of AirPods andApple Watch. Year-over-year Wearables, Home and Accessories net sales increased during the first nine months of 2022 due primarily to higher net sales ofApple Watch and AirPods.Apple Inc. | Q3 2022 Form 10-Q | 15 --------------------------------------------------------------------------------
Services
Services net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales from advertising, cloud services andAppleCare . Year-over-year Services net sales increased during the first nine months of 2022 due primarily to higher net sales from advertising, the App Store® and cloud services.
Segment Operating Performance
The Company manages its business primarily on a geographic basis. The Company's reportable segments consist of theAmericas ,Europe ,Greater China ,Japan and Rest ofAsia Pacific .Americas includes bothNorth and South America .Europe includes European countries, as well asIndia , theMiddle East andAfrica .Greater China includesChina mainland,Hong Kong andTaiwan . Rest ofAsia Pacific includesAustralia 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 I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated Financial Statements in Note 9, "Segment Information and Geographic Data." The following table shows net sales by reportable segment for the three- and nine-month periods endedJune 25, 2022 andJune 26, 2021 (dollars in millions): Three Months Ended Nine Months Ended June 25, June 26, June 25, June 26, 2022 2021 Change 2022 2021 Change Net sales by reportable segment: Americas$ 37,472 $ 35,870 4 %$ 129,850 $ 116,486 11 % Europe 19,287 18,943 2 % 72,323 68,513 6 % Greater China 14,604 14,762 (1) % 58,730 53,803 9 % Japan 5,446 6,464 (16) % 20,277 22,491 (10) % Rest of Asia Pacific 6,150 5,395 14 % 23,002 21,164 9 % Total net sales$ 82,959 $ 81,434 2 %$ 304,182 $ 282,457 8 % AmericasAmericas net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of Services and iPhone, partially offset by lower net sales of Mac and Wearables, Home and Accessories. Year-over-yearAmericas net sales increased during the first nine months of 2022 due primarily to higher net sales of iPhone, Services and Wearables, Home and Accessories. EuropeEurope net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of iPhone, partially offset by lower net sales of Mac. Year-over-yearEurope net sales increased during the first nine months of 2022 due primarily to higher net sales of Services and iPhone. The weakness in foreign currencies relative to theU.S. dollar had a net unfavorable impact onEurope net sales during the third quarter and first nine months of 2022.
Greater China net sales decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to lower net sales of iPhone, partially offset by higher net sales of Services. Year-over-yearGreater China net sales increased during the first nine months of 2022 due primarily to higher net sales of iPhone and Services. The weakness in foreign currencies relative to theU.S. dollar had an unfavorable impact onGreater China net sales during the third quarter of 2022. The strength of the renminbi relative to theU.S. dollar had a favorable impact onGreater China net sales during the first nine months of 2022.
Japan net sales decreased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to lower net sales of iPhone and iPad. The weakness of the yen relative to theU.S. dollar had an unfavorable impact onJapan net sales during the third quarter and first nine months of 2022.Apple Inc. | Q3 2022 Form 10-Q | 16 --------------------------------------------------------------------------------
Rest of
Rest ofAsia Pacific net sales increased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to higher net sales of iPhone and Services. Year-over-year Rest ofAsia Pacific net sales increased during the first nine months of 2022 due primarily to higher net sales of Services, iPhone and Mac. The weakness in foreign currencies relative to theU.S. dollar had a net unfavorable impact on Rest ofAsia Pacific net sales during the third quarter and first nine months of 2022.
Gross Margin
Products and Services gross margin and gross margin percentage for the three- and nine-month periods endedJune 25, 2022 andJune 26, 2021 were as follows (dollars in millions): Three Months Ended Nine Months Ended June 25, June 26, June 25, June 26, 2022 2021 2022 2021 Gross margin: Products$ 21,870 $ 23,049 $ 90,157 $ 82,833 Services 14,015 12,206 42,530 34,829 Total gross margin$ 35,885 $ 35,255 $ 132,687 $ 117,662 Gross margin percentage: Products 34.5 % 36.0 % 36.8 % 35.7 % Services 71.5 % 69.8 % 72.2 % 69.5 % Total gross margin percentage 43.3 % 43.3 % 43.6 % 41.7 % Products Gross Margin Products gross margin decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to the weakness in foreign currencies relative to theU.S. dollar. Year-over-year Products gross margin increased during the first nine months of 2022 due primarily to a different Products mix and higher Products volume, partially offset by the weakness in foreign currencies relative to theU.S. dollar. Products gross margin percentage decreased during the third quarter of 2022 compared to the third quarter of 2021 due primarily to the weakness in foreign currencies relative to theU.S. dollar and a different Products mix. Year-over-year Products gross margin percentage increased during the first nine months of 2022 due primarily to a different Products mix.
Services Gross Margin
Services gross margin increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to higher Services net sales, partially offset by the weakness in foreign currencies relative to theU.S. dollar. Services gross margin percentage increased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to improved leverage and a different Services mix, partially offset by the weakness in foreign currencies relative to theU.S. dollar and 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 2021 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.Apple Inc. | Q3 2022 Form 10-Q | 17 --------------------------------------------------------------------------------
Operating Expenses
Operating expenses for the three- and nine-month periods ended
Three Months Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2022 2021 2022 2021
Research and development $ 6,797 $ 5,717 $ 19,490 $ 16,142
Percentage of total net sales 8 % 7 % 6 % 6 %
Selling, general and administrative $ 6,012 $ 5,412 $ 18,654 $ 16,357
Percentage of total net sales 7 % 7 % 6 % 6 %
Total operating expenses $ 12,809 $ 11,129 $ 38,144 $ 32,499
Percentage of total net sales 15 % 14 % 13 % 12 %
Research and Development
The growth in research and development ("R&D") expense during the third quarter
and first nine months of 2022 compared to the same periods in 2021 was driven
primarily by increases in headcount-related expenses, engineering program costs
and professional services. 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 third quarter and first nine months of 2022 compared to the same periods in 2021 was driven primarily by increases in headcount-related expenses, advertising and professional services.
Other Income/(Expense), Net
Other income/(expense), net ("OI&E") for the three- and nine-month periods ended
Three Months Ended Nine Months Ended
June 25, June 26, June 25, June 26,
2022 2021 Change 2022 2021 Change
Interest and dividend income $ 722 $ 719 $ 2,072 $ 2,184
Interest expense (719) (665) (2,104) (1,973)
Other income/(expense), net (13) 189 (65) 585
Total other income/(expense), net $ (10) $ 243 (104) % $ (97) $ 796 (112) %
OI&E decreased during the third quarter and first nine months of 2022 compared to the same periods in 2021 due primarily to fair value adjustments and realized losses on marketable securities and higher interest expense, partially offset by foreign exchange gains. Provision for Income Taxes Provision for income taxes, effective tax rate and statutory federal income tax rate for the three- and nine-month periods endedJune 25, 2022 andJune 26, 2021 were as follows (dollars in millions): Three Months Ended Nine Months Ended June 25, June 26, June 25, June 26, 2022 2021 2022 2021 Provision for income taxes$ 3,624 $ 2,625 $ 15,364 $ 11,830 Effective tax rate 15.7 % 10.8 % 16.3
% 13.8 % Statutory federal income tax rate 21 % 21 % 21 % 21 %
The Company's effective tax rate for the third quarter and first nine months of 2022 was lower than the statutory federal income tax rate due primarily to a lower effective tax rate on foreign earnings, tax benefits from share-based compensation and the impact of theU.S. federal R&D tax credit, partially offset by state income taxes.Apple Inc. | Q3 2022 Form 10-Q | 18 -------------------------------------------------------------------------------- The Company's effective tax rate for the third quarter of 2022 was higher compared to the third quarter of 2021 due primarily to a higher effective tax rate on foreign earnings and an adjustment to prior years' foreign-derived intangible income deductions. The Company's effective tax rate for the first nine months of 2022 was higher compared to the same period in 2021 due primarily to a higher effective tax rate on foreign earnings, lower tax benefits from share-based compensation, and the impact toU.S. foreign tax credits as a result of regulations issued by theU.S. Department of the Treasury inJanuary 2022 .
Liquidity and Capital Resources
The Company believes its balances of cash, cash equivalents and unrestricted marketable securities, 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 contractual cash requirements have not changed materially since the 2021 Form 10-K, except for manufacturing purchase obligations.
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. Outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. As ofJune 25, 2022 , the Company had manufacturing purchase obligations of$43.1 billion , with$43.0 billion payable within 12 months. The Company's manufacturing purchase obligations are primarily noncancelable. In addition to its contractual cash requirements, the Company has a share repurchase program authorized by the Board of Directors (the "Program"). The Program does not obligate the Company to acquire a minimum amount of shares. As ofJune 25, 2022 , the Company's quarterly cash dividend was$0.23 per share. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles 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 condensed consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2021 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company's condensed consolidated financial statements. There have been no material changes to the Company's critical accounting estimates since the 2021 Form 10-K.
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