APPLE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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 section of this Form 10-K generally discusses 2020 and 2019
items and year-to-year comparisons between 2020 and 2019. Discussions of 2018
items and year-to-year comparisons between 2019 and 2018 that are not included
in this Form 10-K 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 28,
2019.
Fiscal Year Highlights
COVID-19 Update
COVID-19 has spread rapidly throughout the world, prompting governments and
businesses to take unprecedented measures in response. Such measures have
included restrictions on travel and business operations, temporary closures of
businesses, and quarantines and shelter-in-place orders. The COVID-19 pandemic
has 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 adversely affected and
could in the future materially adversely impact the Company's business, results
of operations, financial condition and stock price.

During 2020, aspects of the Company's business were adversely affected by the
COVID-19 pandemic, with many of the Company's retail stores, as well as channel
partner points of sale, temporarily closed at various times, and the vast
majority of the Company's employees working remotely. The Company has reopened
some of its offices and the majority of its retail stores, subject to operating
restrictions to protect public health and the health and safety of employees and
customers, and it continues to work on safely re-opening the remainder of its
offices and retail stores, subject to local rules and regulations.

The full extent of the future impact of the COVID-19 pandemic on the Company's
operational and financial performance is currently uncertain and will depend on
many factors outside the Company's control, including, without limitation, the
timing, extent, trajectory and duration of the pandemic, the development and
availability of effective treatments and vaccines, the imposition of protective
public safety measures, and the impact of the pandemic on the global economy and
demand for consumer products. Refer to Part I, Item 1A of this Form 10-K under
the heading "Risk Factors," for more information.
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.
Fiscal 2020 Highlights
Total net sales increased 6% or $14.3 billion during 2020 compared to 2019,
primarily driven by higher net sales of Services and Wearables, Home and
Accessories. The weakness in foreign currencies had an unfavorable impact on net
sales during 2020.
In April 2020, the Company announced an increase to its current share repurchase
program authorization from $175 billion to $225 billion and raised its quarterly
dividend from $0.1925 to $0.205 per share beginning in May 2020. During 2020,
the Company repurchased $72.5 billion of its common stock and paid dividends and
dividend equivalents of $14.1 billion.
On August 28, 2020, the Company effected a four-for-one stock split to
shareholders of record as of August 24, 2020. All share, RSU and per share or
per RSU information has been retroactively adjusted to reflect the stock split.
                        Apple Inc. | 2020 Form 10-K | 20
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Products and Services Performance
The following table shows net sales by category for 2020, 2019 and 2018 (dollars
in millions):
                                             2020         Change        2019         Change        2018
Net sales by category:
iPhone (1)                                $ 137,781         (3) %    $ 142,381        (14) %    $ 164,888
Mac (1)                                      28,622         11  %       25,740          2  %       25,198
iPad (1)                                     23,724         11  %       21,280         16  %       18,380
Wearables, Home and Accessories (1)(2)       30,620         25  %       24,482         41  %       17,381
Services (3)                                 53,768         16  %       46,291         16  %       39,748
Total net sales                           $ 274,515          6  %    $ 260,174         (2) %    $ 265,595


(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 advertising, AppleCare,
digital content and other services. Services net sales also include amortization
of the deferred value of Maps, Siri, and free iCloud® storage and Apple TV+
services, which are bundled in the sales price of certain products.
iPhone
iPhone net sales decreased during 2020 compared to 2019 due primarily to the
absence of new iPhone models in the fourth quarter of 2020 and the weakness in
foreign currencies relative to the U.S. dollar, partially offset by the
introduction of iPhone SE in the third quarter of 2020.
Mac
Mac net sales increased during 2020 compared to 2019 due primarily to higher net
sales of MacBook Pro.
iPad
iPad net sales increased during 2020 compared to 2019 due primarily to higher
net sales of 10-inch versions of iPad, iPad Air and iPad Pro.
Wearables, Home and Accessories
Wearables, Home and Accessories net sales increased during 2020 compared to 2019
due primarily to higher net sales of AirPods and Apple Watch.
Services
Services net sales increased during 2020 compared to 2019 due primarily to
higher net sales from the App Store, advertising and cloud services.
                        Apple Inc. | 2020 Form 10-K | 21
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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 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.
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."
The following table shows net sales by reportable segment for 2020, 2019 and
2018 (dollars in millions):
                                       2020         Change        2019         Change        2018
Net sales by reportable segment:
Americas                            $ 124,556          7  %    $ 116,914          4  %    $ 112,093
Europe                                 68,640         14  %       60,288         (3) %       62,420
Greater China                          40,308         (8) %       43,678        (16) %       51,942
Japan                                  21,418          -  %       21,506         (1) %       21,733
Rest of Asia Pacific                   19,593         10  %       17,788          2  %       17,407
Total net sales                     $ 274,515          6  %    $ 260,174         (2) %    $ 265,595


Americas
Americas net sales increased during 2020 compared to 2019 due primarily to
higher net sales of Services and Wearables, Home and Accessories. The weakness
in foreign currencies relative to the U.S. dollar had an unfavorable impact on
Americas net sales during 2020.
Europe
Europe net sales increased during 2020 compared to 2019 due primarily to higher
net sales of iPhone, Wearables, Home and Accessories and Services. The weakness
in foreign currencies relative to the U.S. dollar had an unfavorable impact on
Europe net sales during 2020.
Greater China
Greater China net sales decreased during 2020 compared to 2019 due primarily to
lower net sales of iPhone, partially offset by higher net sales of Services and
iPad. The weakness in foreign currencies relative to the U.S. dollar had an
unfavorable impact on Greater China net sales during 2020.
Japan
Japan net sales were flat during 2020 compared to 2019 due primarily to lower
net sales of iPhone, offset by higher net sales of Services and Wearables, Home
and Accessories. The strength of the Japanese yen relative to the U.S. dollar
had a favorable impact on Japan net sales during 2020.
Rest of Asia Pacific
Rest of Asia Pacific net sales increased during 2020 compared to 2019 due
primarily to higher net sales of Wearables, Home and Accessories, Services and
iPhone. The weakness in foreign currencies relative to the U.S. dollar had an
unfavorable impact on Rest of Asia Pacific net sales during 2020.
                        Apple Inc. | 2020 Form 10-K | 22
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Gross Margin
Products and Services gross margin and gross margin percentage for 2020, 2019
and 2018 were as follows (dollars in millions):
                        2020           2019          2018
Gross margin:
Products             $  69,461      $ 68,887      $  77,683
Services                35,495        29,505         24,156
Total gross margin   $ 104,956      $ 98,392      $ 101,839


Gross margin percentage:
Products                           31.5  %      32.2  %      34.4  %
Services                           66.0  %      63.7  %      60.8  %

Total gross margin percentage 38.2 % 37.8 % 38.3 %

Products Gross Margin
Products gross margin increased during 2020 compared to 2019 due primarily to
higher Products volume and material cost savings, partially offset by the
weakness in foreign currencies relative to the U.S. dollar and a different
Products mix. Products gross margin percentage decreased during 2020 compared to
2019 due primarily to the weakness in foreign currencies relative to the U.S.
dollar and a different Products mix, partially offset by material cost savings
and higher leverage.
Services Gross Margin
Services gross margin increased during 2020 compared to 2019 due primarily to
higher Services net sales and a different Services mix. Services gross margin
percentage increased during 2020 compared to 2019 due primarily to a different
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
set forth 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 remain under downward pressure.
Operating Expenses
Operating expenses for 2020, 2019 and 2018 were as follows (dollars in
millions):
                                          2020         Change        2019         Change        2018
Research and development               $ 18,752          16  %    $ 16,217          14  %    $ 14,236
Percentage of total net sales                 7  %                       6  %                       5  %
Selling, general and administrative    $ 19,916           9  %    $ 18,245           9  %    $ 16,705
Percentage of total net sales                 7  %                       7  %                       6  %
Total operating expenses               $ 38,668          12  %    $ 34,462          11  %    $ 30,941
Percentage of total net sales                14  %                      13  %                      12  %


Research and Development
The year-over-year growth in R&D expense in 2020 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 year-over-year growth in selling, general and administrative expense in 2020
was driven primarily by increases in headcount-related expenses, higher spending
on marketing and advertising, and higher variable selling expenses.
                        Apple Inc. | 2020 Form 10-K | 23
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Other Income/(Expense), Net Other income/(expense), net ("OI&E") for 2020, 2019 and 2018 was as follows (dollars in millions):

                                      2020        Change       2019        Change       2018
Interest and dividend income        $ 3,763                  $ 4,961                  $ 5,686
Interest expense                     (2,873)                  (3,576)                  (3,240)
Other income/(expense), net             (87)                     422                     (441)

Total other income/(expense), net $ 803 (56) % $ 1,807 (10) % $ 2,005

The year-over-year decrease in OI&E during 2020 was due primarily to lower
interest income and net impairment/gain activity on non-marketable securities,
partially offset by lower interest expense. The weighted-average interest rate
earned by the Company on its cash, cash equivalents and marketable securities
was 1.85% and 2.19% in 2020 and 2019, respectively.
Provision for Income Taxes
Provision for income taxes, effective tax rate and statutory federal income tax
rate for 2020, 2019 and 2018 were as follows (dollars in millions):
                                       2020          2019           2018

Provision for income taxes $ 9,680 $ 10,481 $ 13,372 Effective tax rate

                     14.4  %        15.9  %        18.3  %

Statutory federal income tax rate 21 % 21 % 24.5 %

The Company's effective tax rate for both 2020 and 2019 was lower than the
statutory federal income tax rate due primarily to the lower tax rate on foreign
earnings, including the impact of tax settlements, and tax benefits from
share-based compensation.
The Company's effective tax rate for 2020 was lower compared to 2019 due
primarily to a one-time adjustment of U.S. foreign tax credits in response to
regulations issued by the U.S. Department of the Treasury in December 2019 in
connection with the U.S. Tax Cuts and Jobs Act of 2017 (the "Act") and higher
tax benefits from share-based compensation.
As of September 26, 2020, the Company had net deferred tax assets arising from
deductible temporary differences and tax credits of $11.0 billion and deferred
tax liabilities of $2.8 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 recover the net deferred
tax assets. The Company will continue to evaluate the amount of the valuation
allowance, if any, by assessing the realizability of deferred tax assets.
Recent Accounting Pronouncements
Financial Instruments
In June 2016, the Financial 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 will not have a material
impact on its consolidated financial statements.
                        Apple Inc. | 2020 Form 10-K | 24
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Liquidity and Capital Resources
The following table presents selected financial information and statistics as of
and for the years ended September 26, 2020, September 28, 2019 and September 29,
2018 (in millions):
                                                          2020               2019               2018

Cash, cash equivalents and marketable securities (1) $ 191,830 $ 205,898 $ 237,100 Property, plant and equipment, net

$  36,766          $  37,378          $  41,304
Commercial paper                                      $   4,996          $   5,980          $  11,964
Total term debt                                       $ 107,440          $ 102,067          $ 102,519
Working capital                                       $  38,321          $  57,101          $  15,410
Cash generated by operating activities                $  80,674          $  69,391          $  77,434
Cash generated by/(used in) investing activities      $  (4,289)         $  45,896          $  16,066
Cash used in financing activities                     $ (86,820)         $ 

(90,976) $ (87,876)

(1)As of September 26, 2020 and September 28, 2019, total marketable securities
included $18.6 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 Consolidated Financial Statements in Part II, Item 8 of this
Form 10-K) 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 of September 26, 2020, 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 legal proceedings. Further information regarding the State Aid
Decision can be found in Part II, Item 8 of this Form 10-K in the Notes to
Consolidated Financial Statements in Note 5, "Income Taxes."
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 2020, cash generated by operating activities of $80.7 billion was a
result of $57.4 billion of net income, non-cash adjustments to net income of
$17.6 billion and an increase in the net change in operating assets and
liabilities of $5.7 billion. Cash used in investing activities of $4.3 billion
during 2020 consisted primarily of cash used to acquire property, plant and
equipment of $7.3 billion and cash paid for business acquisitions, net of cash
acquired, of $1.5 billion, partially offset by proceeds from maturities and
sales of marketable securities, net of purchases, of $5.5 billion. Cash used in
financing activities of $86.8 billion during 2020 consisted primarily of cash
used to repurchase common stock of $72.4 billion, cash used to pay dividends and
dividend equivalents of $14.1 billion, cash used to repay or redeem term debt of
$12.6 billion and net repayments of commercial paper of $1.0 billion, partially
offset by net proceeds from the issuance of term debt of $16.1 billion.
During 2019, cash generated by operating activities of $69.4 billion was a
result of $55.3 billion of net income and non-cash adjustments to net income of
$17.6 billion, partially offset by a decrease in the net change in operating
assets and liabilities of $3.5 billion. Cash generated by investing activities
of $45.9 billion during 2019 consisted primarily of proceeds from sales and
maturities of marketable securities, net of purchases, of $57.5 billion,
partially offset by cash used to acquire property, plant and equipment of $10.5
billion. Cash used in financing activities of $91.0 billion during 2019
consisted primarily of cash used to repurchase common stock of $66.9 billion,
cash used to pay dividends and dividend equivalents of $14.1 billion, cash used
to repay term debt of $8.8 billion and net repayments of commercial paper of
$6.0 billion, partially offset by net proceeds from the issuance of term debt of
$7.0 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 of September 26, 2020, the Company had $5.0 billion of
Commercial Paper outstanding, with a weighted-average interest rate of 0.62% and
maturities generally less than nine months.
The Company may enter into agreements to sell certain of its marketable
securities with a promise to repurchase the securities at a specified time and
amount as an additional short-term liquidity arrangement.
                        Apple Inc. | 2020 Form 10-K | 25
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As of September 26, 2020, the Company had outstanding floating- and fixed-rate
notes with varying maturities for an aggregate principal amount of $106.1
billion (collectively the "Notes"). During 2020, the Company issued $16.1
billion and repaid or redeemed $12.6 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 II, Item 8 of this Form 10-K in the Notes to
Consolidated Financial Statements in Note 3, "Financial Instruments" and Note 6,
"Debt."
Capital Return Program
As of September 26, 2020, the Company was authorized to purchase up to $225
billion of the Company's common stock under a share repurchase program, of which
$168.6 billion had been utilized. During 2020, the Company repurchased 917
million shares of its common stock for $72.5 billion, including 141 million
shares delivered under a $10.0 billion November 2019 ASR and 64 million shares
delivered under a $6.0 billion May 2020 ASR. 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.
As of September 26, 2020, the Company's quarterly cash dividend was $0.205 per
share. The Company intends to increase its dividend on an annual basis, subject
to declaration by the Board of Directors.
Contractual Obligations
The following table presents certain payments due by the Company as of
September 26, 2020, and includes amounts already recorded on the Consolidated
Balance Sheet, except for manufacturing purchase obligations, other purchase
obligations and certain lease obligations (in millions):
                                 Payments due        Payments due in       Payments due in        Payments due
                                   in 2021              2022-2023             2024-2025            after 2025            Total
Term debt                       $     8,750          $     20,958          $     21,029          $    55,341          $ 106,078
Leases                                1,622                 3,097                 2,352                5,888             12,959

Manufacturing purchase
obligations (1)                      47,961                 1,849                    61                   40             49,911
Other purchase obligations            6,178                 2,736                   400                   90              9,404
Deemed repatriation tax payable       1,533                 5,923                12,955                9,254             29,665
Total                           $    66,044          $     34,563          $     36,797          $    70,613          $ 208,017


(1)Represents amount expected to be paid under manufacturing-related supplier
arrangements, which are primarily noncancelable.
Leases
The Company has lease arrangements for certain equipment and facilities,
including retail, corporate, manufacturing and data center space. The Company's
retail store and other facility leases typically have original terms not
exceeding 10 years and generally contain multi-year renewal options. The above
contractual obligations table includes future payments under leases that had
commenced as of September 26, 2020, and were therefore recorded on the Company's
Consolidated Balance Sheet, as well as leases that had been signed but not yet
commenced as of September 26, 2020. Further information regarding the Company's
leases can be found in Part II, Item 8 of this Form 10-K in the Notes to
Consolidated Financial Statements in Note 12, "Leases."
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.
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.
                        Apple Inc. | 2020 Form 10-K | 26
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Deemed Repatriation Tax Payable
As of September 26, 2020, a significant portion of the other non-current
liabilities in the Company's Consolidated Balance Sheet consisted of the deemed
repatriation tax payable imposed by the Act. 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; therefore, such amounts are not included in the
above contractual obligations table.
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. 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 of manufacturing-related assets
and estimation of inventory 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
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
stand-alone selling prices ("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 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.
The Company's process for determining estimated SSPs 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 SSPs and the future rate of
related amortization for product-related bundled services and unspecified
software upgrade rights related to future sales of these devices could change.
Factors subject to change include the nature of the product-related bundled
services and unspecified software upgrade rights offered, their estimated value
and the estimated period they are expected to be provided.
Valuation of Manufacturing-Related Assets and Estimation of Inventory Purchase
Commitment Cancellation Fees
The Company invests in manufacturing-related assets, including capital assets
held at its suppliers' facilities and prepayments provided to certain of its
suppliers associated with long-term agreements to secure the supply of
inventory. The Company also accrues estimated purchase commitment cancellation
fees related to inventory orders that have been canceled or are expected to be
canceled. The Company's estimates of future product development plans and demand
for its products are key inputs in determining the recoverability of
manufacturing-related assets and assessing the adequacy of any purchase
commitment cancellation fee accruals. If there is an abrupt and substantial
decline in estimated 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 write-downs or impairments of manufacturing-related assets or
accrue purchase commitment cancellation fees.
                        Apple Inc. | 2020 Form 10-K | 27
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Warranty Costs
The Company offers limited warranties on its new and certified refurbished
hardware products and on parts used to repair its hardware products, and
customers may purchase extended service coverage, where available, on many of
the Company's hardware products. The Company accrues 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 outside the Company's typical experience.
If actual product failure rates or repair costs differ from estimates, revisions
to the estimated warranty liabilities would be required.
Income Taxes
The Company recognizes tax benefits from uncertain tax positions 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 measured
based on the largest benefit that has a greater-than-50% likelihood of being
realized upon ultimate settlement. 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. Except as described in
Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial
Statements in Note 10, "Commitments and Contingencies" 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 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 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.
Interest Rate Risk
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.
The Company's investment policy and strategy are focused on the 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, 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. 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, 2020 and September 28, 2019, a hypothetical 100 basis point
increase in interest rates across all maturities would result in a $3.1 billion
and $2.8 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.
                        Apple Inc. | 2020 Form 10-K | 28
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As of September 26, 2020 and September 28, 2019, the Company had outstanding
floating- and fixed-rate notes with varying maturities for an aggregate carrying
amount of $107.4 billion and $102.1 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 26, 2020 and
September 28, 2019 to increase by $218 million and $325 million on an annualized
basis, respectively.
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 pricing due to competitive pressures when
there has 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 in the future may enter, into foreign
currency contracts to partially offset the foreign currency exchange gains and
losses on its foreign currency-denominated debt issuances. The Company generally
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 or the
prohibitive economic cost of hedging particular exposures.
To provide an 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 $551 million as of September 26, 2020,
compared to a maximum one-day loss in fair value of $452 million as of
September 28, 2019. Because the Company uses foreign currency instruments for
hedging purposes, the losses 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, debt and derivative positions may differ materially from the
sensitivity analyses performed as of September 26, 2020 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.
                        Apple Inc. | 2020 Form 10-K | 29

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