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 year ended September 26, 2020 (the
"2020 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 2020 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 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.
COVID-19 Update
The COVID-19 pandemic has prompted governments and businesses to take
unprecedented measures, such as 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
affected and could in the future materially impact the Company's business,
results of operations, financial condition and stock price.
During the first quarter of 2021, aspects of the Company's business continued to
be 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 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 reopening 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 availability,
distribution and effectiveness of 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 the 2020 Form 10-K under the
heading "Risk Factors," for more information.
Apple Inc. | Q1 2021 Form 10-Q | 22
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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.
First Quarter Fiscal 2021 Highlights
Total net sales increased 21% or $19.6 billion during the first quarter of 2021
compared to the same quarter in 2020, driven by higher net sales in all Products
and Services categories. Additionally, net sales in all of the Company's
geographic reportable segments grew during the first quarter of 2021.
During the first quarter of 2021, the Company released the following products
and services:
•iPhone 12, iPhone 12 mini, iPhone 12 Pro and iPhone 12 Pro Max, all with 5G
technology;
•MacBook Air®, 13-inch MacBook Pro® and Mac mini®, all powered by M1, the
Company's first chip designed specifically for the Mac;
•An all-new iPad Air®;
•AirPods Max™, new over-ear wireless headphones, and HomePod mini™; and
•Apple Fitness+SM, a fitness subscription service.
The Company repurchased $24.0 billion of its common stock and paid dividends and
dividend equivalents of $3.6 billion during the first quarter of 2021.
Products and Services Performance
The following table shows net sales by category for the three months ended
December 26, 2020 and December 28, 2019 (dollars in millions):
Three Months Ended
December 26, December 28,
2020 2019 Change
Net sales by category:
iPhone (1) $ 65,597 $ 55,957 17 %
Mac (1) 8,675 7,160 21 %
iPad (1) 8,435 5,977 41 %
Wearables, Home and Accessories (1)(2) 12,971 10,010 30 %
Services (3) 15,761 12,715 24 %
Total net sales $ 111,439 $ 91,819 21 %
(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 increased during the first quarter of 2021 compared to the same
quarter in 2020 due primarily to higher net sales from the successful launch of
the Company's four new iPhone models and a favorable mix of iPhone sales.
Mac
Mac net sales increased during the first quarter of 2021 compared to the same
quarter in 2020 due primarily to higher net sales of MacBook Air and MacBook
Pro.
iPad
iPad net sales increased during the first quarter of 2021 compared to the same
quarter in 2020 due primarily to higher net sales of iPad Air and iPad Pro®.
Apple Inc. | Q1 2021 Form 10-Q | 23
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Wearables, Home and Accessories
Wearables, Home and Accessories net sales increased during the first quarter of
2021 compared to the same quarter in 2020 due primarily to higher net sales of
Apple Watch, accessories and AirPods.
Services
Services net sales increased during the first quarter of 2021 compared to the
same quarter in 2020 due primarily to higher net sales from the App Store ,
advertising and cloud 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 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 I, Item 1 of this Form 10-Q in the Notes to Condensed Consolidated
Financial Statements in Note 11, "Segment Information and Geographic Data."
The following table shows net sales by reportable segment for the three months
ended December 26, 2020 and December 28, 2019 (dollars in millions):
Three Months Ended
December 26, December 28,
2020 2019 Change
Net sales by reportable segment: Americas$ 46,310 $ 41,367 12 % Europe 27,306 23,273 17 % Greater China 21,313 13,578 57 % Japan 8,285 6,223 33 % Rest of Asia Pacific 8,225 7,378 11 % Total net sales$ 111,439 $ 91,819 21 % AmericasAmericas net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of Services, iPhone and Wearables, Home and Accessories. EuropeEurope net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of Wearables, Home and Accessories, iPhone and iPad. Greater ChinaGreater China net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of iPhone, iPad and Wearables, Home and Accessories. The strength of the Chinese renminbi relative to theU.S. dollar had a favorable impact onGreater China net sales during the first quarter of 2021. JapanJapan net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of iPhone, Services and iPad. The strength of the Japanese yen relative to theU.S. dollar had a favorable impact onJapan net sales during the first quarter of 2021.Apple Inc. | Q1 2021 Form 10-Q | 24 -------------------------------------------------------------------------------- Rest ofAsia Pacific Rest ofAsia Pacific net sales increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher net sales of Services, iPad and Wearables, Home and Accessories. The movement of foreign currencies in the Rest ofAsia Pacific relative to theU.S. dollar had a net favorable impact on net sales during the first quarter of 2021. Gross Margin Products and Services gross margin and gross margin percentage for the three months endedDecember 26, 2020 andDecember 28, 2019 were as follows (dollars in millions): Three Months Ended December 26, December 28, 2020 2019 Gross margin: Products$ 33,548 $ 27,029 Services 10,780 8,188 Total gross margin$ 44,328 $ 35,217 Gross margin percentage: Products 35.1 % 34.2 % Services 68.4 % 64.4 % Total gross margin percentage 39.8 % 38.4 % Products Gross Margin Products gross margin increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher Products volume and a different Products mix. Products gross margin percentage increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher leverage. Services Gross Margin Services gross margin increased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to higher Services net sales and a different Services mix. Services gross margin percentage increased during the first quarter of 2021 compared to the same quarter in 2020 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 discussed in Part I, Item 1A of the 2020 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 26, 2020 andDecember 28, 2019 were as follows (dollars in millions): Three Months Ended December 26, December 28, 2020 2019 Research and development$ 5,163 $ 4,451 Percentage of total net sales 5 % 5 % Selling, general and administrative$ 5,631 $ 5,197 Percentage of total net sales 5 % 6 % Total operating expenses$ 10,794 $ 9,648 Percentage of total net sales 10 % 11 %
Apple Inc. | Q1 2021 Form 10-Q | 25 -------------------------------------------------------------------------------- Research and Development The growth in research and development ("R&D") expense during the first quarter of 2021 compared to the same quarter 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 growth in selling, general and administrative expense during the first quarter of 2021 compared to the same quarter in 2020 was driven primarily by increases in headcount-related expenses and higher variable selling expenses. Other Income/(Expense), Net Other income/(expense), net ("OI&E") for the three months endedDecember 26, 2020 andDecember 28, 2019 was as follows (dollars in millions): Three Months EndedDecember 26 ,December 28, 2020 2019
Change
Interest and dividend income$ 747 $ 1,045 Interest expense (638) (785) Other income/(expense), net (64) 89 Total other income/(expense), net$ 45 $ 349
(87) %
OI&E decreased during the first quarter of 2021 compared to the same quarter in 2020 due primarily to lower interest income and an adjustment to the carrying value of a non-marketable security, partially offset by lower interest expense. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.49% and 2.08% in the first quarter of 2021 and 2020, respectively. Provision for Income Taxes Provision for income taxes, effective tax rate and statutory federal income tax rate for the three months endedDecember 26, 2020 andDecember 28, 2019 were as follows (dollars in millions): Three Months Ended December 26, December 28, 2020 2019 Provision for income taxes$ 4,824 $ 3,682 Effective tax rate 14.4 % 14.2 % Statutory federal income tax rate 21 % 21 % The Company's effective tax rate for the first quarter of 2021 was lower than the statutory federal income tax rate due primarily to lower tax rates on foreign earnings and tax benefits from share-based compensation. The Company's effective tax rate for the first quarter of 2021 was relatively flat compared to the same quarter in 2020.Apple Inc. | Q1 2021 Form 10-Q | 26 -------------------------------------------------------------------------------- Liquidity and Capital Resources The following tables present selected financial information and statistics as ofDecember 26, 2020 andSeptember 26, 2020 and for the first three months of 2021 and 2020 (in millions): December 26, September 26, 2020 2020 Cash, cash equivalents and marketable securities (1)$ 195,571 $ 191,830 Property, plant and equipment, net$ 37,933 $ 36,766 Commercial paper$ 5,000 $ 4,996 Total term debt$ 107,043 $ 107,440 Working capital$ 21,599 $ 38,321 Three Months Ended December 26, December 28, 2020 2019
Cash generated by operating activities
(1)As ofDecember 26, 2020 andSeptember 26, 2020 , total marketable securities included$19.5 billion and$18.6 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 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 I, Item 1 of this Form 10-Q in the Notes to Condensed 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 the three months endedDecember 26, 2020 , cash generated by operating activities of$38.8 billion was a result of$28.8 billion of net income, non-cash adjustments to net income of$4.7 billion and an increase in the net change in operating assets and liabilities of$5.4 billion . Cash used in investing activities of$8.6 billion during the three months endedDecember 26, 2020 consisted primarily of cash used for purchases of marketable securities, net of maturities and sales, of$5.3 billion and cash used to acquire property, plant and equipment of$3.5 billion . Cash used in financing activities of$32.2 billion during the three months endedDecember 26, 2020 consisted primarily of cash used to repurchase common stock of$24.8 billion , cash used to pay dividends and dividend equivalents of$3.6 billion , cash used for taxes related to net share settlement of equity awards of$2.9 billion , and cash used to repay term debt of$1.0 billion . 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 . 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 26, 2020 , the Company had$5.0 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.10% and maturities generally less than nine months.Apple Inc. | Q1 2021 Form 10-Q | 27 -------------------------------------------------------------------------------- As ofDecember 26, 2020 , the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of$105.9 billion (collectively the "Notes"). During the first three months of 2021, the Company 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 As ofDecember 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$192.6 billion had been utilized. During the three months endedDecember 26, 2020 , the Company repurchased 200 million shares of its common stock for$24.0 billion . 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 Securities Exchange Act of 1934, as amended (the "Exchange Act"). As ofDecember 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 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 Company's total fixed lease payment obligation of$13.0 billion as ofDecember 26, 2020 included future payments under leases that had commenced as ofDecember 26, 2020 , and were therefore recorded on the Company's Condensed Consolidated Balance Sheet, as well as leases that had been signed but not yet commenced as ofDecember 26, 2020 . 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 26, 2020 , the Company expects to pay$45.8 billion under manufacturing-related supplier arrangements, which are primarily noncancelable. Other Purchase Obligations The Company's other purchase obligations primarily consist of noncancelable obligations to acquire capital assets, including product tooling and manufacturing process equipment, and noncancelable obligations related to advertising, content creation and Internet and telecommunications services. As ofDecember 26, 2020 , the Company had other purchase obligations of$7.8 billion . Deemed Repatriation Tax Payable As ofDecember 26, 2020 , the balance of the deemed repatriation tax payable imposed by theU.S. Tax Cuts and Jobs Act (the "Act") was$29.9 billion , of which$28.1 billion was included in other non-current liabilities in the Company's Condensed Consolidated Balance Sheet. The Company pays 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 2021 Form 10-Q | 28
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Critical Accounting Policies and 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. 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. Note 1, "Summary of Significant Accounting Policies" 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 2020 Form 10-K, and "Critical Accounting Policies and Estimates" in Part II, Item 7 of the 2020 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 policies and estimates since the 2020 Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Company's market risk during the first three months of 2021. 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 2020 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 ofDecember 26, 2020 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 theSEC 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. Changes in Internal Control over Financial Reporting There were no changes in the Company's internal control over financial reporting during the first quarter of 2021, 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.
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