UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 26, 2015
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36743
Apple Inc.
(Exact name of Registrant as specified in its charter)
California | 94-2404110 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1 Infinite Loop Cupertino, California |
95014 | |
(Address of principal executive offices) | (Zip Code) |
(408) 996-1010
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.00001 par value per share 1.000% Notes due 2022 1.625% Notes due 2026 3.05% Notes due 2029 3.60% Notes due 2042 1.375% Notes due 2024 2.000% Notes due 2027 |
The NASDAQ Stock Market LLC New York Stock Exchange LLC New York Stock Exchange LLC New York Stock Exchange LLC New York Stock Exchange LLC New York Stock Exchange LLC New York Stock Exchange LLC | |
(Title of class) | (Name of exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
Accelerated filer |
¨ | ||||
Non-accelerated filer ¨ |
(Do not check if a smaller reporting company) |
Smaller reporting company |
¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of March 27, 2015, the last business day of the Registrants most recently completed second fiscal quarter, was approximately $709,923,000,000. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the Registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.
5,575,331,000 shares of common stock were issued and outstanding as of October 9, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement relating to its 2016 annual meeting of shareholders (the 2016 Proxy Statement) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2016 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Apple Inc.
Form 10-K
For the Fiscal Year Ended September 26, 2015
This Annual Report on Form 10-K (Form 10-K) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as future, anticipates, believes, estimates, expects, intends, will, would, could, can, may, and similar terms. Forward-looking statements are not guarantees of future performance and the Companys actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading Risk Factors, which are incorporated herein by reference. All information presented herein is based on the Companys fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Companys 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.
Item 1. | Business |
Company Background
The Company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Companys products and services include iPhone®, iPad®, Mac®, iPod®, Apple Watch®, Apple TV®, a portfolio of consumer and professional software applications, iOS, OS X® and watchOS operating systems, iCloud®, Apple Pay® and a variety of accessory, service and support offerings. In September 2015, the Company announced a new Apple TV, tvOS operating system and Apple TV App Store®, which are expected to be available by the end of October 2015. The Company sells and delivers digital content and applications through the iTunes Store®, App Store, Mac App Store, iBooks Store and Apple Music (collectively Internet Services). The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party Apple compatible products, including application software and various accessories through its online and retail stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers. The Companys fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Company is a California corporation established in 1977.
Business Strategy
The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services. The Companys business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content and applications through its Internet Services, which allows customers to discover and download digital content, iOS, Mac and Apple Watch applications, and books through either a Mac or Windows-based computer or through iPhone, iPad and iPod touch® devices (iOS devices) and Apple Watch. The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Companys offerings. The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Companys products and services greatly enhances its ability to attract and retain customers. Therefore, the Companys strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience. The Company believes ongoing investment in research and development (R&D), marketing and advertising is critical to the development and sale of innovative products and technologies.
Apple Inc. | 2015 Form 10-K | 1
Business Organization
The Company manages its business primarily on a geographic basis. In 2015, the Company changed its reportable operating segments as management began reporting business performance and making decisions primarily on a geographic basis, including the results of its retail stores in each respective geographic segment. Accordingly, the Companys reportable operating segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and those Asian countries not included in the Companys other reportable operating segments. Although each reportable operating segment provides similar hardware and software products and similar services, they are managed separately to better align with the location of the Companys customers and distribution partners and the unique market dynamics of each geographic region. Further information regarding the Companys reportable operating segments may be found in Part II, Item 7 of this Form 10-K under the subheading Segment Operating Performance, and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, Segment Information and Geographic Data.
Products
iPhone
iPhone is the Companys line of smartphones based on its iOS operating system. iPhone includes Siri®, a voice activated intelligent assistant, and Apple Pay and Touch ID on qualifying devices. In September 2015, the Company introduced iPhone 6s and 6s Plus, featuring 3D Touch, which senses force to access features and interact with content and apps. iPhone works with the iTunes Store, App Store and iBooks Store for purchasing, organizing and playing digital content and apps. iPhone is compatible with both Mac and Windows personal computers and Apples iCloud services, which provide synchronization across users devices.
iPad
iPad is the Companys line of multi-purpose tablets based on its iOS operating system, which includes iPad Air® and iPad mini. iPad includes Siri and also includes Touch ID on qualifying devices. In September 2015, the Company announced the new iPad Pro, featuring a 12.9-inch Retina® display, which is expected to be available in November 2015. iPad works with the iTunes Store, App Store and iBooks Store for purchasing, organizing and playing digital content and apps. iPad is compatible with both Mac and Windows personal computers and Apples iCloud services.
Mac
Mac is the Companys line of desktop and portable personal computers based on its OS X operating system. The Companys desktop computers include iMac®, 21.5 iMac with Retina 4K Display, 27 iMac with Retina 5K Display, Mac Pro® and Mac mini. The Companys portable computers include MacBook®, MacBook Air®, MacBook Pro® and MacBook Pro with Retina display.
Operating System Software
iOS
iOS is the Companys Multi-Touch operating system that serves as the foundation for iOS devices. Devices running iOS are compatible with both Mac and Windows personal computers and Apples iCloud services. In September 2015, the Company released iOS 9, which provides more search abilities and improved Siri features. iOS 9 also introduced new multitasking features designed specifically for iPad, including Slide Over and Split View, which allow users to work with two apps simultaneously, and Picture-in-Picture that allows users to watch a video while using another application.
OS X
OS X is the Companys Mac operating system and is built on an open-source UNIX-based foundation and provides an intuitive and integrated computer experience. Support for iCloud is built into OS X so users can access content and information from Mac, iOS devices and other supported devices and access downloaded content and apps from the iTunes Store. OS X El Capitan, released in September 2015, is the 12th major release of OS X and incorporates additional window management features, including Split View and the new Spaces Bar in Mission Control®, which provides users an intuitive way to group applications.
Apple Inc. | 2015 Form 10-K | 2
watchOS
watchOS is the Companys operating system for Apple Watch. Released in September 2015, watchOS 2 is the first major software update for Apple Watch, providing users with new features, including new watch faces, the ability to add third-party app information on watch faces, Time Travel, and additional communication capabilities in Mail, Friends and Digital Touch. watchOS 2 also gives developers the ability to build native apps for Apple Watch.
tvOS
In September 2015, the Company announced tvOS, its operating system for the new Apple TV, which is expected to be available at the end of October 2015. The tvOS operating system is based on the Companys iOS platform and will enable developers to create new apps and games specifically for Apple TV and deliver them to customers through the new Apple TV App Store.
Application Software
The Companys application software includes iLife®, iWork® and various other software, including Final Cut Pro®, Logic® Pro X and FileMaker® Pro. iLife is the Companys consumer-oriented digital lifestyle software application suite included with all Mac computers and features iMovie®, a digital video editing application, and GarageBand®, a music creation application that allows users to play, record and create music. iWork is the Companys integrated productivity suite included with all Mac computers and is designed to help users create, present and publish documents through Pages®, presentations through Keynote® and spreadsheets through Numbers®. The Company also has Multi-Touch versions of iLife and iWork applications designed specifically for use on iOS devices, which are available as free downloads for all new iPhones and iPads.
Services
Internet Services
The iTunes Store, available for iOS devices, Mac and Windows personal computers and Apple TV, allows customers to purchase and download music and TV shows, rent or purchase movies and download free podcasts. The App Store, available for iOS devices, allows customers to discover and download apps and purchase in-app content. The Mac App Store, available for Mac computers, allows customers to discover, download and install Mac applications. The iBooks Store, available for iOS devices and Mac computers, features e-books from major and independent publishers. Apple Music offers users a curated listening experience with on-demand radio stations that evolve based on a users play or download activity and a subscription-based internet streaming service that also provides unlimited access to the Apple Music library. In September 2015, the Company announced the Apple TV App Store, which provides customers access to apps and games specifically for the new Apple TV.
iCloud
iCloud is the Companys cloud service which stores music, photos, contacts, calendars, mail, documents and more, keeping them up-to-date and available across multiple iOS devices, Mac and Windows personal computers and Apple TV. iCloud services include iCloud DriveSM, iCloud Photo Library, Family Sharing, Find My iPhone, Find My Friends, Notes, iCloud Keychain® and iCloud Backup for iOS devices.
AppleCare
AppleCare® offers a range of support options for the Companys customers. These include assistance that is built into software products, printed and electronic product manuals, online support including comprehensive product information as well as technical assistance, the AppleCare Protection Plan (APP) and the AppleCare+ Protection Plan (AC+). APP is a fee-based service that typically extends the service coverage of phone support, hardware repairs and dedicated web-based support resources for Mac, Apple TV and display products. AC+ is a fee-based service offering additional coverage under some circumstances for instances of accidental damage in addition to the services offered by APP and is available in certain countries for iPhone, iPad, Apple Watch and iPod.
Apple Pay
Apple Pay is the Companys mobile payment service available in the U.S. and U.K. that offers an easy, secure and private way to pay. Apple Pay allows users to pay for purchases in stores accepting contactless payments and to pay for purchases within participating apps on qualifying devices. Apple Pay accepts credit and debit cards across major card networks and also supports reward programs and store-issued credit and debit cards.
Apple Inc. | 2015 Form 10-K | 3
Other Products
Accessories
The Company sells a variety of Apple-branded and third-party Mac-compatible and iOS-compatible accessories, including Apple TV, Apple Watch, headphones, displays, storage devices, Beats products, and various other connectivity and computing products and supplies.
Apple TV
Apple TV connects to consumers TVs and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos. Content from Apple Music and other media services are also available on Apple TV. Apple TV allows streaming digital content from Mac and Windows personal computers through Home Share and through AirPlay® from compatible Mac and iOS devices. In September 2015, the Company announced the new Apple TV running on the Companys tvOS operating system and based on apps built for the television. Additionally, the new Apple TV remote features Siri, allowing users to search and access content with their voice. The new Apple TV is expected to be available at the end of October 2015.
Apple Watch
Apple Watch is a personal electronic device that combines the watchOS user interface and technologies created specifically for a smaller device, including the Digital Crown, a unique navigation tool that allows users to seamlessly scroll, zoom and navigate, and Force Touch, a technology that senses the difference between a tap and a press and allows users to access controls within apps. Apple Watch enables users to communicate in new ways from their wrist, track their health and fitness through activity and workout apps, and includes Siri and Apple Pay.
iPod
iPod is the Companys line of portable digital music and media players, which includes iPod touch, iPod nano® and iPod shuffle®. All iPods work with iTunes to purchase and synchronize content. iPod touch, based on the Companys iOS operating system, is a flash-memory-based iPod that works with the iTunes Store, App Store and iBooks Store for purchasing and playing digital content and apps.
Developer Programs
The Companys developer programs support app developers with building, testing and distributing apps for iOS, Mac, Apple Watch and the new Apple TV. Developer program membership provides access to beta software, the ability to integrate advanced app capabilities (e.g., iCloud, Game Center and Apple Pay), distribution on the App Store, access to App Analytics, and code-level technical support. Developer programs also exist for businesses creating apps for internal use (the Apple Developer Enterprise Program) and developers creating accessories for Apple devices (the MFi Program). All developers, even those who are not developer program members, can sign in with their Apple ID to post on the Apple Developer Forums and use Xcode®, the Companys integrated development environment for creating apps for Apple platforms. Xcode includes project management tools; analysis tools to collect, display and compare app performance data; simulation tools to locally run, test and debug apps; and tools to simplify the design and development of user interfaces. All developers also have access to extensive technical documentation and sample code.
Markets and Distribution
The Companys customers are primarily in the consumer, small and mid-sized business, education, enterprise and government markets. The Company sells its products and resells third-party products in most of its major markets directly to consumers and small and mid-sized businesses through its retail and online stores and its direct sales force. The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers and value-added resellers. During 2015, the Companys net sales through its direct and indirect distribution channels accounted for 26% and 74%, respectively, of total net sales.
The Company believes that sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value of the hardware and software integration and demonstrate the unique solutions that are available on its products. The Company further believes providing direct contact with its targeted customers is an effective way to demonstrate the advantages of its products over those of its competitors and providing a high-quality sales and after-sales support experience is critical to attracting new and retaining existing customers.
To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company continues to build and improve its distribution capabilities by expanding the number of its own retail stores worldwide. The Companys retail stores are typically located at high-traffic locations in quality shopping malls and urban shopping districts. By operating its own stores and locating them in desirable high-traffic locations the Company is better positioned to ensure a high quality customer buying experience and attract new customers. The stores are designed to simplify and enhance the presentation and marketing of the Companys products and related solutions. The retail stores employ experienced and knowledgeable personnel who provide product advice, service and training and offer a wide selection of third-party hardware, software and other accessories that complement the Companys products.
Apple Inc. | 2015 Form 10-K | 4
The Company has also invested in programs to enhance reseller sales by placing high-quality Apple fixtures, merchandising materials and other resources within selected third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus on the Apple platform by providing a high level of product expertise, integration and support services.
The Company is committed to delivering solutions to help educators teach and students learn. The Company believes effective integration of technology into classroom instruction can result in higher levels of student achievement and has designed a range of products, services and programs to address the needs of education customers. The Company also supports mobile learning and real-time distribution of, and access to, education related materials through iTunes U, a platform that allows students and teachers to share and distribute educational media online. The Company sells its products to the education market through its direct sales force, select third-party resellers and its online and retail stores.
The Company also sells its hardware and software products to enterprise and government customers in each of its reportable operating segments. The Companys products are deployed in these markets because of their performance, productivity, ease of use and seamless integration into information technology environments. The Companys products are compatible with thousands of third-party business applications and services, and its tools enable the development and secure deployment of custom applications as well as remote device administration.
No single customer accounted for more than 10% of net sales in 2015, 2014 or 2013.
Competition
The markets for the Companys products and services are highly competitive and the Company is confronted by aggressive competition in all areas of its business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities and use of mobile communication and media devices, personal computers and other digital electronic devices. The Companys competitors that sell mobile devices and personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. The Companys financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to the Company include price, product features (including security features), relative price and performance, product quality and reliability, design innovation, a strong third-party software and accessories ecosystem, marketing and distribution capability, service and support and corporate reputation.
The Company is focused on expanding its market opportunities related to personal computers and mobile communication and media devices. These markets are highly competitive and include many large, well-funded and experienced participants. The Company expects competition in these markets to intensify significantly as competitors attempt to imitate some of the features of the Companys products and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. These markets are characterized by aggressive pricing practices, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by competitors and price sensitivity on the part of consumers and businesses.
The Companys digital content services have faced significant competition from other companies promoting their own digital music and content products and services, including those offering free peer-to-peer music and video services.
The Companys future financial condition and operating results depend on the Companys ability to continue to develop and offer new innovative products and services in each of the markets in which it competes. The Company believes it offers superior innovation and integration of the entire solution including the hardware (iOS devices, Mac, Apple Watch and Apple TV), software (iOS, OS X, watchOS and tvOS), online services and distribution of digital content and applications (Internet Services). Some of the Companys current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Companys offerings.
Supply of Components
Although most components essential to the Companys business are generally available from multiple sources, a number of components are currently obtained from single or limited sources. In addition, the Company competes for various components with other participants in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant pricing fluctuations that could materially adversely affect the Companys financial condition and operating results.
Apple Inc. | 2015 Form 10-K | 5
The Company uses some custom components that are not commonly used by its competitors, and the Company often utilizes custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers yields have matured or manufacturing capacity has increased. If the Companys supply of components were delayed or constrained, or if an outsourcing partner delayed shipments of completed products to the Company, the Companys financial condition and operating results could be materially adversely affected. The Companys business and financial performance could also be materially adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers concentrated on the production of common components instead of components customized to meet the Companys requirements.
The Company has entered into agreements for the supply of many components; however, there can be no guarantee that the Company will be able to extend or renew these agreements on similar terms, or at all. Therefore, the Company remains subject to significant risks of supply shortages and price increases that could materially adversely affect its financial condition and operating results.
While some Mac computers are manufactured in the U.S. and Ireland, substantially all of the Companys hardware products are currently manufactured by outsourcing partners that are located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Companys products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Companys operating results could be adversely affected if its outsourcing partners were unable to meet their production commitments. The Companys purchase commitments typically cover its requirements for periods up to 150 days.
Research and Development
Because the industries in which the Company competes are characterized by rapid technological advances, the Companys ability to compete successfully depends heavily upon its ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. The Company continues to develop new technologies to enhance existing products and to expand the range of its product offerings through R&D, licensing of intellectual property and acquisition of third-party businesses and technology. Total R&D expense was $8.1 billion, $6.0 billion and $4.5 billion in 2015, 2014 and 2013, respectively.
Patents, Trademarks, Copyrights and Licenses
The Company currently holds rights to patents and copyrights relating to certain aspects of its hardware devices, accessories, software and services. The Company has registered or has applied for trademarks and service marks in the U.S. and a number of foreign countries. Although the Company believes the ownership of such patents, copyrights, trademarks and service marks is an important factor in its business and that its success does depend in part on such ownership, the Company relies primarily on the innovative skills, technical competence and marketing abilities of its personnel.
The Company regularly files patent applications to protect innovations arising from its research, development and design, and is currently pursuing thousands of patent applications around the world. Over time, the Company has accumulated a large portfolio of issued patents around the world. The Company holds copyrights relating to certain aspects of its products and services. No single patent or copyright is solely responsible for protecting the Companys products. The Company believes the duration of its patents is adequate relative to the expected lives of its products.
Many of the Companys products are designed to include intellectual property obtained from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of its products, processes and services. While the Company has generally been able to obtain such licenses on commercially reasonable terms in the past, there is no guarantee that such licenses could be obtained in the future on reasonable terms or at all. Because of technological changes in the industries in which the Company competes, current extensive patent coverage and the rapid rate of issuance of new patents, it is possible that certain components of the Companys products, processes and services may unknowingly infringe existing patents or intellectual property rights of others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third parties.
Foreign and Domestic Operations and Geographic Data
During 2015, the Companys domestic and international net sales accounted for 35% and 65%, respectively, of total net sales. Information regarding financial data by geographic segment is set forth in Part II, Item 7 of this Form 10-K under the subheading Segment Operating Performance, and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, Segment Information and Geographic Data.
Apple Inc. | 2015 Form 10-K | 6
While some Mac computers are manufactured in the U.S. and Ireland, substantially all of the Companys hardware products are currently manufactured by outsourcing partners that are located primarily in Asia. The supply and manufacture of a number of components is performed by sole-sourced outsourcing partners in the U.S., Asia and Europe. Margins on sales of the Companys products in foreign countries and on sales of products that include components obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade regulations, including tariffs and antidumping penalties. Information regarding concentration in the available sources of supply of materials and products is set forth in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 10, Commitments and Contingencies.
Business Seasonality and Product Introductions
The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Product introductions can also impact the Companys net sales to its indirect distribution channels as these channels are filled with new product inventory following a product introduction, and often, channel inventory of a particular product declines as the next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of the Companys future pattern of product introductions, future net sales or financial performance.
Warranty
The Company offers a limited parts and labor warranty on most of its hardware products. The basic warranty period is typically one year from the date of purchase by the original end-user. The Company also offers a 90-day basic warranty for its service parts used to repair the Companys hardware products. In certain jurisdictions, local law requires that manufacturers guarantee their products for a period prescribed by statute, typically at least two years. In addition, where available, consumers may purchase APP or AC+, which extends service coverage on many of the Companys hardware products.
Backlog
In the Companys experience, the actual amount of product backlog at any particular time is not a meaningful indication of its future business prospects. In particular, backlog often increases immediately following new product introductions as customers anticipate shortages. Backlog is often reduced once customers believe they can obtain sufficient supply. Because of the foregoing, backlog should not be considered a reliable indicator of the Companys ability to achieve any particular level of revenue or financial performance.
Employees
As of September 26, 2015, the Company had approximately 110,000 full-time equivalent employees.
Available Information
The Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are filed with the Securities and Exchange Commission (the SEC). The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Companys website at investor.apple.com/sec.cfm when such reports are available on the SECs website. The public may read and copy any materials filed by the Company with the SEC at the SECs Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Companys references to website URLs are intended to be inactive textual references only.
Apple Inc. | 2015 Form 10-K | 7
Item 1A. | Risk Factors |
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-K. The following information should be read in conjunction with Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes in Part II, Item 8, Financial Statements and Supplementary Data of this Form 10-K.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Companys actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Companys business, financial condition, operating results and stock price.
Because of the following factors, as well as other factors affecting the Companys financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Global and regional economic conditions could materially adversely affect the Company.
The Companys operations and performance depend significantly on global and regional economic conditions. Uncertainty about global and regional economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, higher unemployment, financial market volatility, government austerity programs, negative financial news, declines in income or asset values and/or other factors. These worldwide and regional economic conditions could have a material adverse effect on demand for the Companys products and services. Demand also could differ materially from the Companys expectations as a result of currency fluctuations because the Company generally raises prices on goods and services sold outside the U.S. to correspond with the effect of a strengthening of the U.S. dollar. Other factors that could influence worldwide or regional demand include changes in fuel and other energy costs, conditions in the real estate and mortgage markets, unemployment, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could materially adversely affect demand for the Companys products and services.
In the event of financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry, or significant financial service institution failures, there could be tightening in the credit markets, low liquidity and extreme volatility in fixed income, credit, currency and equity markets. This could have a number of effects on the Companys business, including the insolvency or financial instability of outsourcing partners or suppliers or their inability to obtain credit to finance development and/or manufacture products resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of the Companys products; failure of derivative counterparties and other financial institutions; and restrictions on the Companys ability to issue new debt. Other income and expense also could vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges resulting from revaluations of debt and equity securities and other investments; changes in interest rates; increases or decreases in cash balances; volatility in foreign exchange rates; and changes in fair value of derivative instruments. Increased volatility in the financial markets and overall economic uncertainty would increase the risk of the actual amounts realized in the future on the Companys financial instruments differing significantly from the fair values currently assigned to them.
Global markets for the Companys products and services are highly competitive and subject to rapid technological change, and the Company may be unable to compete effectively in these markets.
The Companys products and services compete in highly competitive global markets characterized by aggressive price cutting and resulting downward pressure on gross margins, frequent introduction of new products, short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological and product advancements by competitors and price sensitivity on the part of consumers.
The Companys ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of innovative new products, services and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its products, including the hardware, operating system, numerous software applications and related services. As a result, the Company must make significant investments in R&D. The Company currently holds a significant number of patents and copyrights and has registered and/or has applied to register numerous patents, trademarks and service marks. In contrast, many of the Companys competitors seek to compete primarily through aggressive pricing and very low cost structures, and emulating the Companys products and infringing on its intellectual property. If the Company is unable to continue to develop and sell innovative new products with attractive margins or if competitors infringe on the Companys intellectual property, the Companys ability to maintain a competitive advantage could be adversely affected.
Apple Inc. | 2015 Form 10-K | 8
The Company markets certain mobile communication and media devices based on the iOS mobile operating system and also markets related third-party digital content and applications. The Company faces substantial competition in these markets from companies that have significant technical, marketing, distribution and other resources, as well as established hardware, software and digital content supplier relationships; and the Company has a minority market share in the global smartphone market. Additionally, the Company faces significant price competition as competitors reduce their selling prices and attempt to imitate the Companys product features and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. The Company competes with business models that include content provided to users for free. The Company also competes with illegitimate ways to obtain third-party digital content and applications. Some of the Companys competitors have greater experience, product breadth and distribution channels than the Company. Because some current and potential competitors have substantial resources and/or experience and a lower cost structure, they may be able to provide products and services at little or no profit or even at a loss. The Company also expects competition to intensify as competitors attempt to imitate the Companys approach to providing components seamlessly within their individual offerings or work collaboratively to offer integrated solutions. The Companys financial condition and operating results depend substantially on the Companys ability to continually improve iOS and iOS devices in order to maintain their functional and design advantages.
The Company is the only authorized maker of hardware using OS X, which has a minority market share in the personal computer market. This market has been contracting and is dominated by computer makers using competing operating systems, most notably Windows. In the market for personal computers and accessories, the Company faces a significant number of competitors, many of which have broader product lines, lower priced products and a larger installed customer base. Historically, consolidation in this market has resulted in larger competitors. Price competition has been particularly intense as competitors selling Windows-based personal computers have aggressively cut prices and lowered product margins. An increasing number of internet-enabled devices that include software applications and are smaller and simpler than traditional personal computers compete for market share with the Companys existing products. The Companys financial condition and operating results also depend on its ability to continually improve the Mac platform to maintain its functional and design advantages.
There can be no assurance the Company will be able to continue to provide products and services that compete effectively.
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.
Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce new products, services and technologies, enhance existing products and services, effectively stimulate customer demand for new and upgraded products and successfully manage the transition to these new and upgraded products. The success of new product introductions depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, the Companys ability to manage the risks associated with new product production ramp-up issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and at expected costs to meet anticipated demand and the risk that new products may have quality or other defects or deficiencies in the early stages of introduction. Accordingly, the Company cannot determine in advance the ultimate effect of new product introductions and transitions.
The Company depends on the performance of distributors, carriers and other resellers.
The Company distributes its products through cellular network carriers, wholesalers, national and regional retailers and value-added resellers, many of whom distribute products from competing manufacturers. The Company also sells its products and third-party products in most of its major markets directly to education, enterprise and government customers and consumers and small and mid-sized businesses through its online and retail stores.
Carriers providing cellular network service for iPhone typically subsidize users purchases of the device. There is no assurance that such subsidies will be continued at all or in the same amounts upon renewal of the Companys agreements with these carriers or in agreements the Company enters into with new carriers.
Apple Inc. | 2015 Form 10-K | 9
Many resellers have narrow operating margins and have been adversely affected in the past by weak economic conditions. Some resellers have perceived the expansion of the Companys direct sales as conflicting with their business interests as distributors and resellers of the Companys products. Such a perception could discourage resellers from investing resources in the distribution and sale of the Companys products or lead them to limit or cease distribution of those products. The Company has invested and will continue to invest in programs to enhance reseller sales, including staffing selected resellers stores with Company employees and contractors, and improving product placement displays. These programs could require a substantial investment while providing no assurance of return or incremental revenue. The financial condition of these resellers could weaken, these resellers could stop distributing the Companys products, or uncertainty regarding demand for some or all of the Companys products could cause resellers to reduce their ordering and marketing of the Companys products.
The Company faces substantial inventory and other asset risk in addition to purchase commitment cancellation risk.
The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated demand or net realizable value and accrues necessary cancellation fee reserves for orders of excess products and components. The Company also reviews its long-lived assets, including capital assets held at its suppliers facilities and inventory prepayments, for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If the Company determines that impairment has occurred, it records a write-down equal to the amount by which the carrying value of the assets exceeds its fair value. Although the Company believes its provisions related to inventory, capital assets, inventory prepayments and other assets and purchase commitments are currently adequate, no assurance can be given that the Company will not incur additional related charges given the rapid and unpredictable pace of product obsolescence in the industries in which the Company competes.
The Company must order components for its products and build inventory in advance of product announcements and shipments. Consistent with industry practice, components are normally acquired through a combination of purchase orders, supplier contracts and open orders, in each case based on projected demand. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. Purchase commitments typically cover forecasted component and manufacturing requirements for periods up to 150 days. Because the Companys markets are volatile, competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient amounts of components or products, or not fully utilize firm purchase commitments.
Future operating results depend upon the Companys ability to obtain components in sufficient quantities.
Because the Company currently obtains components from single or limited sources, the Company is subject to significant supply and pricing risks. Many components, including those that are available from multiple sources, are at times subject to industry-wide shortages and significant commodity pricing fluctuations. While the Company has entered into agreements for the supply of many components, there can be no assurance that the Company will be able to extend or renew these agreements on similar terms, or at all. A number of suppliers of components may suffer from poor financial conditions, which can lead to business failure for the supplier or consolidation within a particular industry, further limiting the Companys ability to obtain sufficient quantities of components. The effects of global or regional economic conditions on the Companys suppliers, described in Global and regional economic conditions could materially adversely affect the Company above, also could affect the Companys ability to obtain components. Therefore, the Company remains subject to significant risks of supply shortages and price increases.
The Company and other participants in the markets for mobile communication and media devices and personal computers also compete for various components with other industries that have experienced increased demand for their products. The Company uses some custom components that are not common to the rest of these industries. The Companys new products often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers yields have matured or manufacturing capacity has increased. Continued availability of these components at acceptable prices, or at all, may be affected for any number of reasons, including if those suppliers decide to concentrate on the production of common components instead of components customized to meet the Companys requirements. The supply of components for a new or existing product could be delayed or constrained, or a key manufacturing vendor could delay shipments of completed products to the Company.
Apple Inc. | 2015 Form 10-K | 10
The Company depends on component and product manufacturing and logistical services provided by outsourcing partners, many of which are located outside of the U.S.
Substantially all of the Companys manufacturing is performed in whole or in part by a few outsourcing partners located primarily in Asia. The Company has also outsourced much of its transportation and logistics management. While these arrangements may lower operating costs, they also reduce the Companys direct control over production and distribution. It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or the Companys flexibility to respond to changing conditions. Although arrangements with these partners may contain provisions for warranty expense reimbursement, the Company may remain responsible to the consumer for warranty service in the event of product defects and could experience an unanticipated product defect or warranty liability. While the Company relies on its partners to adhere to its supplier code of conduct, material violations of the supplier code of conduct could occur.
The Company relies on sole-sourced outsourcing partners in the U.S., Asia and Europe to supply and manufacture many critical components, and on outsourcing partners primarily located in Asia, for final assembly of substantially all of the Companys hardware products. Any failure of these partners to perform may have a negative impact on the Companys cost or supply of components or finished goods. In addition, manufacturing or logistics in these locations or transit to final destinations may be disrupted for a variety of reasons including, but not limited to, natural and man-made disasters, information technology system failures, commercial disputes, military actions or economic, business, labor, environmental, public health, or political issues.
The Company has invested in manufacturing process equipment, much of which is held at certain of its outsourcing partners, and has made prepayments to certain of its suppliers associated with long-term supply agreements. While these arrangements help ensure the supply of components and finished goods, if these outsourcing partners or suppliers experience severe financial problems or other disruptions in their business, such continued supply could be reduced or terminated and the net realizable value of these assets could be negatively impacted.
The Companys products and services may experience quality problems from time to time that can result in decreased sales and operating margin and harm to the Companys reputation.
The Company sells complex hardware and software products and services that can contain design and manufacturing defects. Sophisticated operating system software and applications, such as those sold by the Company, often contain bugs that can unexpectedly interfere with the softwares intended operation. The Companys online services may from time to time experience outages, service slowdowns, or errors. Defects may also occur in components and products the Company purchases from third parties. There can be no assurance the Company will be able to detect and fix all defects in the hardware, software and services it sells. Failure to do so could result in lost revenue, significant warranty and other expenses and harm to the Companys reputation.
The Company relies on access to third-party digital content, which may not be available to the Company on commercially reasonable terms or at all.
The Company contracts with numerous third parties to offer their digital content. This includes the right to sell currently available music, movies, TV shows and books. The licensing or other distribution arrangements with these third parties are for relatively short terms and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all. Some third-party content providers and distributors currently or in the future may offer competing products and services, and could take action to make it more difficult or impossible for the Company to license or otherwise distribute their content in the future. Other content owners, providers or distributors may seek to limit the Companys access to, or increase the cost of, such content. The Company may be unable to continue to offer a wide variety of content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach. Failure to obtain the right to make available third-party digital content, or to make available such content on commercially reasonable terms, could have a material adverse impact on the Companys financial condition and operating results.
Some third-party digital content providers require the Company to provide digital rights management and other security solutions. If requirements change, the Company may have to develop or license new technology to provide these solutions. There is no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose and adopt legislation that would force the Company to license its digital rights management, which could lessen the protection of content and subject it to piracy and also could negatively affect arrangements with the Companys content providers.
Apple Inc. | 2015 Form 10-K | 11
The Companys future performance depends in part on support from third-party software developers.
The Company believes decisions by customers to purchase its hardware products depend in part on the availability of third-party software applications and services. There is no assurance that third-party developers will continue to develop and maintain software applications and services for the Companys products. If third-party software applications and services cease to be developed and maintained for the Companys products, customers may choose not to buy the Companys products.
With respect to its Mac products, the Company believes the availability of third-party software applications and services depends in part on the developers perception and analysis of the relative benefits of developing, maintaining and upgrading such software for the Companys products compared to Windows-based products. This analysis may be based on factors such as the market position of the Company and its products, the anticipated revenue that may be generated, expected future growth of Mac sales and the costs of developing such applications and services. If the Companys minority share of the global personal computer market causes developers to question the Macs prospects, developers could be less inclined to develop or upgrade software for the Companys Mac products and more inclined to devote their resources to developing and upgrading software for the larger Windows market.
With respect to iOS devices, the Company relies on the continued availability and development of compelling and innovative software applications, which are distributed through a single distribution channel, the App Store. iOS devices are subject to rapid technological change, and, if third-party developers are unable to or choose not to keep up with this pace of change, third-party applications might not successfully operate and may result in dissatisfied customers. As with applications for the Companys Mac products, the availability and development of these applications also depend on developers perceptions and analysis of the relative benefits of developing, maintaining or upgrading software for the Companys iOS devices rather than its competitors platforms, such as Android. If developers focus their efforts on these competing platforms, the availability and quality of applications for the Companys iOS devices may suffer.
The Company relies on access to third-party intellectual property, which may not be available to the Company on commercially reasonable terms or at all.
Many of the Companys products include third-party intellectual property, which requires licenses from those third parties. Based on past experience and industry practice, the Company believes such licenses generally can be obtained on reasonable terms. There is, however, no assurance that the necessary licenses can be obtained on acceptable terms or at all. Failure to obtain the right to use third-party intellectual property, or to use such intellectual property on commercially reasonable terms, could preclude the Company from selling certain products or otherwise have a material adverse impact on the Companys financial condition and operating results.
The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights.
The Company is subject to various legal proceedings and claims that have not yet been fully resolved and that have arisen in the ordinary course of business, and additional claims may arise in the future.
For example, technology companies, including many of the Companys competitors, frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. As the Company has grown, the intellectual property rights claims against it have increased and may continue to increase. In particular, the Companys cellular enabled products compete with products from mobile communication and media device companies that hold significant patent portfolios, and the number of patent claims against the Company has significantly increased. The Company is vigorously defending infringement actions in courts in a number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally in various countries. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, the Company may have to engage in protracted litigation. If the Company is found to infringe one or more patents or other intellectual property rights, regardless of whether it can develop non-infringing technology, it may be required to pay substantial damages or royalties to a third-party, or it may be subject to a temporary or permanent injunction prohibiting the Company from marketing or selling certain products.
In certain cases, the Company may consider the desirability of entering into licensing agreements, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Companys operating expenses.
Apple Inc. | 2015 Form 10-K | 12
Regardless of the merit of particular claims, litigation may be expensive, time-consuming, disruptive to the Companys operations and distracting to management. In recognition of these considerations, the Company may enter into arrangements to settle litigation.
In managements opinion, there is not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies, including matters related to infringement of intellectual property rights. However, the outcome of litigation is inherently uncertain.
Although management considers the likelihood of such an outcome to be remote, if one or more legal matters were resolved against the Company in a reporting period for amounts in excess of managements expectations, the Companys consolidated financial statements for that reporting period could be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against the Company that could materially adversely affect its financial condition and operating results.
The Company is subject to laws and regulations worldwide, changes to which could increase the Companys costs and individually or in the aggregate adversely affect the Companys business.
The Company is subject to laws and regulations affecting its domestic and international operations in a number of areas. These U.S. and foreign laws and regulations affect the Companys activities including, but not limited to, in areas of labor, advertising, digital content, consumer protection, real estate, billing, e-commerce, promotions, quality of services, telecommunications, mobile communications and media, television, intellectual property ownership and infringement, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, health and safety.
By way of example, laws and regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are extensive and subject to change. Such changes could include, among others, restrictions on the production, manufacture, distribution and use of devices, locking devices to a carriers network, or mandating the use of devices on more than one carriers network. These devices are also subject to certification and regulation by governmental and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications, or delays in product shipment dates, or could preclude the Company from selling certain products.
Compliance with these laws, regulations and similar requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make the Companys products and services less attractive to the Companys customers, delay the introduction of new products in one or more regions, or cause the Company to change or limit its business practices. The Company has implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that the Companys employees, contractors, or agents will not violate such laws and regulations or the Companys policies and procedures.
The Companys business is subject to the risks of international operations.
The Company derives a significant portion of its revenue and earnings from its international operations. Compliance with applicable U.S. and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy requirements, environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. Although the Company has implemented policies and procedures to comply with these laws and regulations, a violation by the Companys employees, contractors, or agents could nevertheless occur. Violations of these laws and regulations could materially adversely affect the Companys brand, international growth efforts and business.
The Company also could be significantly affected by other risks associated with international activities including, but not limited to, economic and labor conditions, increased duties, taxes and other costs and political instability. Margins on sales of the Companys products in foreign countries, and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. The Company is also exposed to credit and collectability risk on its trade receivables with customers in certain international markets. There can be no assurance the Company can effectively limit its credit risk and avoid losses.
Apple Inc. | 2015 Form 10-K | 13
The Companys retail stores have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties.
The Companys retail stores have required substantial investment in equipment and leasehold improvements, information systems, inventory and personnel. The Company also has entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and serve as vehicles for corporate sales and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than the Companys more typical retail stores. Due to the high cost structure associated with the Companys retail stores, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and severance costs.
Many factors unique to retail operations, some of which are beyond the Companys control, pose risks and uncertainties. These risks and uncertainties include, but are not limited to, macro-economic factors that could have an adverse effect on general retail activity, as well as the Companys inability to manage costs associated with store construction and operation, the Companys failure to manage relationships with its existing retail partners, more challenging environments in managing retail operations outside the U.S., costs associated with unanticipated fluctuations in the value of retail inventory, and the Companys inability to obtain and renew leases in quality retail locations at a reasonable cost.
Investment in new business strategies and acquisitions could disrupt the Companys ongoing business and present risks not originally contemplated.
The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return of capital and unidentified issues not discovered in the Companys due diligence. These new ventures are inherently risky and may not be successful.
The Companys business and reputation may be impacted by information technology system failures or network disruptions.
The Company may be subject to information technology system failures and network disruptions. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions. System redundancy may be ineffective or inadequate, and the Companys disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could, among other things, prevent access to the Companys online stores and services, preclude retail store transactions, compromise Company or customer data, and result in delayed or cancelled orders. System failures and disruptions could also impede the manufacturing and shipping of products, delivery of online services, transactions processing and financial reporting.
There may be breaches of the Companys information technology systems that materially damage business partner and customer relationships, curtail or otherwise adversely impact access to online stores and services, or subject the Company to significant reputational, financial, legal and operational consequences.
The Companys business requires it to use and store customer, employee and business partner personally identifiable information (PII). This may include, among other information, names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers and payment account information. Although malicious attacks to gain access to PII affect many companies across various industries, the Company is at a relatively greater risk of being targeted because of its high profile and the amount of PII it manages.
The Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption and authentication technologies designed to secure the transmission and storage of data and prevent access to Company data or accounts. As with all companies, these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management, or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access the Companys information technology systems. To help protect customers and the Company, the Company monitors accounts and systems for unusual activity and may freeze accounts under suspicious circumstances, which may result in the delay or loss of customer orders.
Apple Inc. | 2015 Form 10-K | 14
The Company devotes significant resources to network security, data encryption and other security measures to protect its systems and data, but these security measures cannot provide absolute security. To the extent the Company was to experience a breach of its systems and was unable to protect sensitive data, such a breach could materially damage business partner and customer relationships, and curtail or otherwise adversely impact access to online stores and services. Moreover, if a computer security breach affects the Companys systems or results in the unauthorized release of PII, the Companys reputation and brand could be materially damaged, use of the Companys products and services could decrease, and the Company could be exposed to a risk of loss or litigation and possible liability. While the Company maintains insurance coverage that, subject to policy terms and conditions and subject to a significant self-insured retention, is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.
The Companys business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
The Company is subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between the Company and its subsidiaries, and among the Company, its subsidiaries and other parties with which the Company has commercial relations. Several jurisdictions have passed laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause the Company to incur substantial costs or require the Company to change its business practices. Noncompliance could result in penalties or significant legal liability.
The Companys privacy policy, which includes related practices concerning the use and disclosure of data, is posted on its website. Any failure by the Company, its suppliers or other parties with whom the Company does business to comply with its posted privacy policy or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against the Company by governmental entities or others.
The Company is also subject to payment card association rules and obligations under its contracts with payment card processors. Under these rules and obligations, if information is compromised, the Company could be liable to payment card issuers for associated expenses and penalties. In addition, if the Company fails to follow payment card industry security standards, even if no customer information is compromised, the Company could incur significant fines or experience a significant increase in payment card transaction costs.
The Companys success depends largely on the continued service and availability of key personnel.
Much of the Companys future success depends on the continued availability and service of key personnel, including its Chief Executive Officer, executive team and other highly skilled employees. Experienced personnel in the technology industry are in high demand and competition for their talents is intense, especially in Silicon Valley, where most of the Companys key personnel are located.
The Companys business may be impacted by political events, war, terrorism, public health issues, natural disasters and other business interruptions.
War, terrorism, geopolitical uncertainties, public health issues and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on the Company, its suppliers, logistics providers, manufacturing vendors and customers, including channel partners. The Companys business operations are subject to interruption by, among others, natural disasters, whether as a result of climate change or otherwise, fire, power shortages, nuclear power plant accidents, terrorist attacks and other hostile acts, labor disputes, public health issues and other events beyond its control. Such events could decrease demand for the Companys products, make it difficult or impossible for the Company to make and deliver products to its customers, including channel partners, or to receive components from its suppliers, and create delays and inefficiencies in the Companys supply chain. Should major public health issues, including pandemics, arise, the Company could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products and disruptions in the operations of the Companys manufacturing vendors and component suppliers. The majority of the Companys R&D activities, its corporate headquarters, information technology systems and other critical business operations, including certain component suppliers and manufacturing vendors, are in locations that could be affected by natural disasters. In the event of a natural disaster, the Company could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.
Apple Inc. | 2015 Form 10-K | 15
The Company expects its quarterly revenue and operating results to fluctuate.
The Companys profit margins vary across its products and distribution channels. The Companys software, accessories, and service and support contracts generally have higher gross margins than certain of the Companys other products. Gross margins on the Companys hardware products vary across product lines and can change over time as a result of product transitions, pricing and configuration changes, and component, warranty, and other cost fluctuations. The Companys direct sales generally have higher associated gross margins than its indirect sales through its channel partners. In addition, the Companys gross margin and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic or channel mix, component cost increases, the strengthening U.S. dollar, price competition, or the introduction of new products, including those that have higher cost structures with flat or reduced pricing.
The Company has typically experienced higher net sales in its first quarter compared to other quarters due in part to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Further, the Company generates a majority of its net sales from a single product and a decline in demand for that product could significantly impact quarterly net sales. The Company could also be subject to unexpected developments late in a quarter, such as lower-than-anticipated demand for the Companys products, issues with new product introductions, an internal systems failure, or failure of one of the Companys logistics, components supply, or manufacturing partners.
The Companys stock price is subject to volatility.
The Companys stock price has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the Company, the technology industry and the stock market as a whole have experienced extreme stock price and volume fluctuations that have affected stock prices in ways that may have been unrelated to these companies operating performance. Price volatility over a given period may cause the average price at which the Company repurchases its own stock to exceed the stocks price at a given point in time. The Company believes its stock price should reflect expectations of future growth and profitability. The Company also believes its stock price should reflect expectations that its cash dividend will continue at current levels or grow and that its current share repurchase program will be fully consummated. Future dividends are subject to declaration by the Companys Board of Directors, and the Companys share repurchase program does not obligate it to acquire any specific number of shares. If the Company fails to meet expectations related to future growth, profitability, dividends, share repurchases or other market expectations, its stock price may decline significantly, which could have a material adverse impact on investor confidence and employee retention.
The Companys financial performance is subject to risks associated with changes in the value of the U.S. dollar versus local currencies.
The Companys primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Companys foreign currency-denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Companys products. Margins on sales of the Companys products in foreign countries and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local prices to fully offset the dollars strengthening, or at all, which would adversely affect the U.S. dollar value of the Companys foreign currency-denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to the Companys foreign currency-denominated sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments, thereby limiting the benefit. Additionally, strengthening of foreign currencies may also increase the Companys cost of product components denominated in those currencies, thus adversely affecting gross margins.
The Company uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.
The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.
Given the global nature of its business, the Company has both domestic and international investments. Credit ratings and pricing of the Companys investments can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk or other factors. As a result, the value and liquidity of the Companys cash, cash equivalents and marketable securities may fluctuate substantially. Therefore, although the Company has not realized any significant losses on its cash, cash equivalents and marketable securities, future fluctuations in their value could result in a significant realized loss.
Apple Inc. | 2015 Form 10-K | 16
The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables and prepayments related to long-term supply agreements, and this risk is heightened during periods when economic conditions worsen.
The Company distributes its products through third-party cellular network carriers, wholesalers, retailers and value-added resellers. The Company also sells its products directly to small and mid-sized businesses and education, enterprise and government customers. A substantial majority of the Companys outstanding trade receivables are not covered by collateral, third-party financing arrangements or credit insurance. The Companys exposure to credit and collectability risk on its trade receivables is higher in certain international markets and its ability to mitigate such risks may be limited. The Company also has unsecured vendor non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture sub-assemblies or assemble final products for the Company. In addition, the Company has made prepayments associated with long-term supply agreements to secure supply of inventory components. As of September 26, 2015, a significant portion of the Companys trade receivables was concentrated within cellular network carriers, and its vendor non-trade receivables and prepayments related to long-term supply agreements were concentrated among a few individual vendors located primarily in Asia. While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor non-trade receivables, as well as long-term prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid losses.
The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.
The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Companys subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Companys effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Companys Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material.
The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Companys effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Companys taxes owed is for an amount in excess of amounts previously accrued, the Companys financial condition, operating results and cash flows could be adversely affected.
Apple Inc. | 2015 Form 10-K | 17
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
The Companys headquarters are located in Cupertino, California. As of September 26, 2015, the Company owned or leased 25.6 million square feet of building space, primarily in the U.S. The Company also owned or leased building space in various locations, including throughout Europe, China, Singapore and Japan. Of the total owned or leased building space 18.5 million square feet was leased building space, which includes approximately 5.3 million square feet related to retail store space. Additionally, the Company owns a total of 1,757 acres of land in various locations.
As of September 26, 2015, the Company owned a manufacturing facility in Cork, Ireland that also housed a customer support call center; facilities in Elk Grove, California that included warehousing and distribution operations and a customer support call center; and a facility in Mesa, Arizona. The Company also owned land in Austin, Texas where it is expanding its existing office space and customer support call center. In addition, the Company owned facilities and land for R&D and corporate functions in San Jose, California and Cupertino, California, including land that is being developed for the Companys second corporate campus. The Company also owned data centers in Newark, California; Maiden, North Carolina; Prineville, Oregon; and Reno, Nevada. Outside the U.S., the Company owned additional facilities for various purposes.
The Company believes its existing facilities and equipment, which are used by all operating segments, are in good operating condition and are suitable for the conduct of its business. The Company has invested in internal capacity and strategic relationships with outside manufacturing vendors and continues to make investments in capital equipment as needed to meet anticipated demand for its products.
Item 3. | Legal Proceedings |
The Company is subject to the legal proceedings and claims discussed below as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of managements expectations, the Companys consolidated financial statements for that reporting period could be materially adversely affected. See the risk factor The Company could be impacted by unfavorable results of legal proceedings, such as being found to have infringed on intellectual property rights in Part I, Item 1A of this Form 10-K under the heading Risk Factors. The Company settled certain matters during the fourth quarter of 2015 that did not individually or in the aggregate have a material impact on the Companys financial condition or operating results.
Apple eBooks Antitrust Litigation (United States of America v. Apple Inc., et al.)
On April 11, 2012, the U.S. Department of Justice filed a civil antitrust action against the Company and five major book publishers in the U.S. District Court for the Southern District of New York, alleging an unreasonable restraint of interstate trade and commerce in violation of §1 of the Sherman Act and seeking, among other things, injunctive relief, the District Courts declaration that the Companys agency agreements with the publishers are null and void and/or the District Courts reformation of such agreements. On July 10, 2013, the District Court found, following a bench trial, that the Company conspired to restrain trade in violation of §1 of the Sherman Act and relevant state statutes to the extent those laws are congruent with §1 of the Sherman Act. The District Court entered a permanent injunction, which took effect on October 6, 2013 and will be in effect for five years unless the judgment is overturned on appeal. The Company has taken the necessary steps to comply with the terms of the District Courts order, including renegotiating agreements with the five major eBook publishers, updating its antitrust training program and completing a two-year monitorship with a court-appointed antitrust compliance monitor, whose appointment the District Court ended in October 2015. The Company appealed the District Courts decision. Pursuant to a settlement agreement reached in June 2014, any damages the Company may be obligated to pay will be determined by the outcome of the final adjudication following exhaustion of all appeals.
Item 4. | Mine Safety Disclosures |
Not applicable.
Apple Inc. | 2015 Form 10-K | 18
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Companys common stock is traded on the NASDAQ Stock Market LLC (NASDAQ) under the symbol AAPL.
Price Range of Common Stock
The price range per share of common stock presented below represents the highest and lowest intraday sales prices for the Companys common stock on the NASDAQ during each quarter of the two most recent years.
Fourth Quarter | Third Quarter | Second Quarter | First Quarter | |||||||||||||
2015 price range per share |
$ | 132.97 - $ 92.00 | $ | 134.54 - $ 123.10 | $ | 133.60 - $ 104.63 | $ | 119.75 - $ 95.18 | ||||||||
2014 price range per share |
$ | 103.74 - $ 92.09 | $ | 95.05 - $ 73.05 | $ | 80.18 - $ 70.51 | $ | 82.16 - $ 67.77 |
Holders
As of October 9, 2015, there were 25,924 shareholders of record.
Dividends
The Company paid a total of $11.4 billion and $11.0 billion in dividends during 2015 and 2014, respectively, and expects to pay quarterly dividends of $0.52 per common share each quarter, subject to declaration by the Board of Directors. The Company also plans to increase its dividend on an annual basis, subject to declaration by the Board of Directors.
Apple Inc. | 2015 Form 10-K | 19
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity during the three months ended September 26, 2015 was as follows (in millions, except number of shares, which are reflected in thousands, and per share amounts):
Periods |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) |
||||||||||||
June 28, 2015 to August 1, 2015: |
||||||||||||||||
May 2015 ASR |
9,973 | (2) | (2) | 9,973 | (2) | |||||||||||
Open market and privately negotiated purchases |
15,882 | $ | 124.66 | 15,882 | ||||||||||||
August 2, 2015 to August 29, 2015: |
||||||||||||||||
Open market and privately negotiated purchases |
68,526 | $ | 114.15 | 68,526 | ||||||||||||
August 30, 2015 to September 26, 2015: |
||||||||||||||||
Open market and privately negotiated purchases |
37,394 | $ | 112.94 | 37,394 | ||||||||||||
|
|
|||||||||||||||
Total |
131,775 | $ | 36,024 | |||||||||||||
|
|
|
|
(1) | In 2012, the Companys Board of Directors authorized a program to repurchase up to $10 billion of the Companys common stock beginning in 2013. The Companys Board of Directors increased the authorization to repurchase the Companys common stock to $60 billion in April 2013, to $90 billion in April 2014 and to $140 billion in April 2015. As of September 26, 2015, $104 billion of the $140 billion had been utilized. The remaining $36 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of September 26, 2015. The Companys share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. |
(2) | In May 2015, the Company entered into an accelerated share repurchase arrangement (ASR) to purchase up to $6.0 billion of the Companys common stock. In July 2015, the purchase period for this ASR ended and an additional 10.0 million shares were delivered and retired. In total, 48.3 million net shares were delivered under this ASR at an average repurchase price of $124.24. |
Apple Inc. | 2015 Form 10-K | 20
Company Stock Performance
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index for the five years ended September 26, 2015. The graph assumes $100 was invested in each of the Companys common stock, the S&P 500 Index, the S&P Information Technology Index and the Dow Jones U.S. Technology Supersector Index as of the market close on September 24, 2010. Note that historic stock price performance is not necessarily indicative of future stock price performance.
* | $100 invested on 9/25/10 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Companys common stock and September 30th for indexes. |
Copyright© 2015 S&P, a division of McGraw Hill Financial. All rights reserved.
Copyright© 2015 Dow Jones & Co. All rights reserved.
September 2010 |
September 2011 |
September 2012 |
September 2013 |
September 2014 |
September 2015 |
|||||||||||||||||||
Apple Inc. |
$ | 100 | $ | 138 | $ | 229 | $ | 170 | $ | 254 | $ | 294 | ||||||||||||
S&P 500 Index |
$ | 100 | $ | 101 | $ | 132 | $ | 157 | $ | 188 | $ | 187 | ||||||||||||
S&P Information Technology Index |
$ | 100 | $ | 104 | $ | 137 | $ | 147 | $ | 190 | $ | 194 | ||||||||||||
Dow Jones U.S. Technology Supersector Index |
$ | 100 | $ | 103 | $ | 134 | $ | 141 | $ | 183 | $ | 183 |
Apple Inc. | 2015 Form 10-K | 21
Item 6. | Selected Financial Data |
The information set forth below for the five years ended September 26, 2015, is not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes thereto included in Part II, Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below (in millions, except number of shares, which are reflected in thousands, and per share amounts).
2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
Net sales |
$ | 233,715 | $ | 182,795 | $ | 170,910 | $ | 156,508 | $ | 108,249 | ||||||||||
Net income |
$ | 53,394 | $ | 39,510 | $ | 37,037 | $ | 41,733 | $ | 25,922 | ||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
$ | 9.28 | $ | 6.49 | $ | 5.72 | $ | 6.38 | $ | 4.01 | ||||||||||
Diluted |
$ | 9.22 | $ | 6.45 | $ | 5.68 | $ | 6.31 | $ | 3.95 | ||||||||||
Cash dividends declared per share |
$ | 1.98 | $ | 1.82 | $ | 1.64 | $ | 0.38 | $ | 0 | ||||||||||
Shares used in computing earnings per share: |
||||||||||||||||||||
Basic |
5,753,421 | 6,085,572 | 6,477,320 | 6,543,726 | 6,469,806 | |||||||||||||||
Diluted |
5,793,069 | 6,122,663 | 6,521,634 | 6,617,483 | 6,556,514 | |||||||||||||||
Total cash, cash equivalents and marketable securities |
$ | 205,666 | $ | 155,239 | $ | 146,761 | $ | 121,251 | $ | 81,570 | ||||||||||
Total assets |
$ | 290,479 | $ | 231,839 | $ | 207,000 | $ | 176,064 | $ | 116,371 | ||||||||||
Commercial paper |
$ | 8,499 | $ | 6,308 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Total term debt (2) |
$ | 55,963 | $ | 28,987 | $ | 16,960 | $ | 0 | $ | 0 | ||||||||||
Other long-term obligations (1) |
$ | 33,427 | $ | 24,826 | $ | 20,208 | $ | 16,664 | $ | 10,100 | ||||||||||
Total liabilities |
$ | 171,124 | $ | 120,292 | $ | 83,451 | $ | 57,854 | $ | 39,756 | ||||||||||
Total shareholders equity |
$ | 119,355 | $ | 111,547 | $ | 123,549 | $ | 118,210 | $ | 76,615 |
(1) | Other long-term obligations exclude non-current deferred revenue. |
(2) | Includes current and long-term portion of term debt. |
Apple Inc. | 2015 Form 10-K | 22
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This section and other parts of this Annual Report on Form 10-K (Form 10-K) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as future, anticipates, believes, estimates, expects, intends, plans, predicts, will, would, could, can, may, and similar terms. Forward-looking statements are not guarantees of future performance and the Companys actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading Risk Factors, which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this Form 10-K. All information presented herein is based on the Companys fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Companys fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the Company and Apple as used herein refers collectively to Apple Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview and Highlights
The Company designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party Apple compatible products, including application software and various accessories through its online and retail stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
Fiscal 2015 Highlights
Net sales rose 28% or $50.9 billion during 2015 compared to 2014, driven by a 52% year-over-year increase in iPhone® net sales. iPhone net sales and unit sales in 2015 increased in all of the Companys reportable operating segments. The Company also experienced year-over-year net sales increases in Mac®, Services and Other Products. Apple Watch®, which launched during the third quarter of 2015, accounted for more than 100% of the year-over-year growth in net sales of Other Products. Net sales growth during 2015 was partially offset by the effect of weakness in most foreign currencies relative to the U.S. dollar and lower iPad® net sales. Total net sales increased in each of the Companys reportable operating segments, with particularly strong growth in Greater China where year-over-year net sales increased 84%.
In April 2015, the Company announced a significant increase to its capital return program by raising the expected total size of the program to $200 billion through March 2017. This included increasing its share repurchase authorization to $140 billion and raising its quarterly dividend to $0.52 per share beginning in May 2015. During 2015, the Company spent $36.0 billion to repurchase shares of its common stock and paid dividends and dividend equivalents of $11.6 billion. Additionally, the Company issued $14.5 billion of U.S. dollar-denominated, 4.8 billion of euro-denominated, SFr1.3 billion of Swiss franc-denominated, £1.3 billion of British pound-denominated, A$2.3 billion of Australian dollar-denominated and ¥250.0 billion of Japanese yen-denominated term debt during 2015.
Fiscal 2014 Highlights
Net sales rose 7% or $11.9 billion during 2014 compared to 2013. This was driven by increases in net sales of iPhone, Mac and Services. Net sales and unit sales increased for iPhone primarily due to the successful introduction of iPhone 5s and 5c in the latter half of calendar year 2013, the successful launch of iPhone 6 and 6 Plus beginning in the fourth quarter of 2014, and expanded distribution. Mac net sales and unit sales increased primarily due to strong demand for MacBook Air® and MacBook Pro® which were updated in 2014 with faster processors and offered at lower prices. Net sales of Services grew primarily due to increased revenue from sales through the App Store®, AppleCare® and licensing. Growth in these areas was partially offset by the year-over-year decline in net sales for iPad due to lower unit sales in many markets, and a decline in net sales of Other Products. All of the Companys operating segments other than the Rest of Asia Pacific segment experienced increased net sales in 2014, with growth being strongest in the Greater China and Japan operating segments.
During 2014, the Company completed various business acquisitions, including the acquisitions of Beats Music, LLC, which offers a subscription streaming music service, and Beats Electronics, LLC, which makes Beats® headphones, speakers and audio software.
Apple Inc. | 2015 Form 10-K | 23
In April 2014, the Company increased its share repurchase authorization to $90 billion and the quarterly dividend was raised to $0.47 per common share, resulting in an overall increase in its capital return program from $100 billion to over $130 billion. During 2014, the Company utilized $45 billion to repurchase its common stock and paid dividends and dividend equivalents of $11.1 billion. The Company also issued $12.0 billion of long-term debt during 2014, with varying maturities through 2044, and launched a commercial paper program, with $6.3 billion outstanding as of September 27, 2014.
Sales Data
The following table shows net sales by operating segment and net sales and unit sales by product during 2015, 2014 and 2013 (dollars in millions and units in thousands):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net Sales by Operating Segment: |
||||||||||||||||||||
Americas |
$ | 93,864 | 17% | $ | 80,095 | 4% | $ | 77,093 | ||||||||||||
Europe |
50,337 | 14% | 44,285 | 8% | 40,980 | |||||||||||||||
Greater China |
58,715 | 84% | 31,853 | 18% | 27,016 | |||||||||||||||
Japan |
15,706 | 3% | 15,314 | 11% | 13,782 | |||||||||||||||
Rest of Asia Pacific |
15,093 | 34% | 11,248 | (7)% | 12,039 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total net sales |
$ | 233,715 | 28% | $ | 182,795 | 7% | $ | 170,910 | ||||||||||||
|
|
|
|
|
|
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Net Sales by Product: |
||||||||||||||||||||
iPhone (1) |
$ | 155,041 | 52% | $ | 101,991 | 12% | $ | 91,279 | ||||||||||||
iPad (1) |
23,227 | (23)% | 30,283 | (5)% | 31,980 | |||||||||||||||
Mac (1) |
25,471 | 6% | 24,079 | 12% | 21,483 | |||||||||||||||
Services (2) |
19,909 | 10% | 18,063 | 13% | 16,051 | |||||||||||||||
Other Products (1)(3) |
10,067 | 20% | 8,379 | (17)% | 10,117 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total net sales |
$ | 233,715 | 28% | $ | 182,795 | 7% | $ | 170,910 | ||||||||||||
|
|
|
|
|
|
|||||||||||||||
Unit Sales by Product: |
||||||||||||||||||||
iPhone |
231,218 | 37% | 169,219 | 13% | 150,257 | |||||||||||||||
iPad |
54,856 | (19)% | 67,977 | (4)% | 71,033 | |||||||||||||||
Mac |
20,587 | 9% | 18,906 | 16% | 16,341 |
(1) | Includes deferrals and amortization of related software upgrade rights and non-software services. |
(2) | Includes revenue from the iTunes Store®, App Store, Mac App Store, iBooks Store and Apple Music (collectively Internet Services), AppleCare, Apple Pay®, licensing and other services. |
(3) | Includes sales of Apple TV®, Apple Watch, Beats products, iPod and Apple-branded and third-party accessories. |
Apple Inc. | 2015 Form 10-K | 24
Product Performance
iPhone
The following table presents iPhone net sales and unit sales information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 155,041 | 52% | $ | 101,991 | 12% | $ | 91,279 | ||||||||||||
Percentage of total net sales |
66% | 56% | 53% | |||||||||||||||||
Unit sales |
231,218 | 37% | 169,219 | 13% | 150,257 |
The year-over-year growth in iPhone net sales and unit sales during 2015 primarily resulted from strong demand for iPhone 6 and 6 Plus during 2015. Overall average selling prices (ASPs) for iPhone increased by 11% during 2015 compared to 2014, due primarily to the introduction of iPhone 6 and 6 Plus in September 2014, partially offset by the effect of weakness in most foreign currencies relative to the U.S. dollar.
The year-over-year growth in iPhone net sales and unit sales in 2014 resulted primarily from the successful introduction of new iPhones in the latter half of calendar year 2013, the successful launch of iPhone 6 and 6 Plus beginning in September 2014, and expanded distribution. iPhone unit sales grew in all of the Companys operating segments, while iPhone net sales grew in all segments except Rest of Asia Pacific. Overall ASPs for iPhone were relatively flat in 2014 compared to 2013, with growth in ASPs in the Americas segment being offset by a decline in ASPs in the Greater China, Japan and Rest of Asia Pacific segments.
iPad
The following table presents iPad net sales and unit sales information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 23,227 | (23)% | $ | 30,283 | (5)% | $ | 31,980 | ||||||||||||
Percentage of total net sales |
10% | 17% | 19% | |||||||||||||||||
Unit sales |
54,856 | (19)% | 67,977 | (4)% | 71,033 |
Net sales and unit sales for iPad declined during 2015 compared to 2014. The Company believes the decline in iPad sales is due in part to a longer repurchase cycle for iPads and some level of cannibalization from the Companys other products. iPad ASPs declined by 5% during 2015 compared to 2014, primarily as a result of the effect of weakness in most foreign currencies relative to the U.S. dollar and a shift in mix to lower-priced iPads.
Net sales and unit sales for iPad declined in 2014 compared to 2013. iPad net sales and unit sales grew in the Greater China and Japan segments but this growth was more than offset by a decline in all other segments. Overall iPad ASPs were relatively flat in 2014 compared to 2013 with a shift in mix to higher-priced iPads being offset by the October 2013 price reduction of iPad mini. ASPs increased in the Japan and Rest of Asia Pacific segments but were slightly down in other segments.
Mac
The following table presents Mac net sales and unit sales information for 2015, 2014 and 2013 (dollars in millions and units in thousands):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 25,471 | 6% | $ | 24,079 | 12% | $ | 21,483 | ||||||||||||
Percentage of total net sales |
11% | 13% | 13% | |||||||||||||||||
Unit sales |
20,587 | 9% | 18,906 | 16% | 16,341 |
The year-over-year growth in Mac net sales and unit sales during 2015 was driven by strong demand for Mac portables. Mac ASPs declined 3% during 2015 compared to 2014 largely due to the effect of weakness in most foreign currencies relative to the U.S. dollar.
The year-over-year growth in Mac net sales and unit sales for 2014 was primarily driven by increased sales of MacBook Air, MacBook Pro and Mac Pro. Mac net sales and unit sales increased in all of the Companys operating segments. Mac ASPs decreased during 2014 compared to 2013 primarily due to price reductions on certain Mac models and a shift in mix towards Mac portable systems.
Apple Inc. | 2015 Form 10-K | 25
Services
The following table presents net sales information of Services for 2015, 2014 and 2013 (dollars in millions):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 19,909 | 10% | $ | 18,063 | 13% | $ | 16,051 | ||||||||||||
Percentage of total net sales |
9% | 10% | 9% |
The increase in net sales of Services during 2015 compared to 2014 was primarily due to growth from Internet Services and licensing. The App Store, included within Internet Services, generated strong year-over-year net sales growth of 29%.
The increase in net sales of Services in 2014 compared to 2013 was primarily due to growth in net sales from Internet Services, AppleCare and licensing. Internet Services generated a total of $10.2 billion in net sales during 2014 compared to $9.3 billion during 2013. Growth in net sales from Internet Services was driven by increases in revenue from app sales reflecting continued growth in the installed base of iOS devices and the expanded offerings of iOS apps and related in-app purchases. This was partially offset by a decline in sales of digital music.
Segment Operating Performance
The Company manages its business primarily on a geographic basis. The Companys reportable operating segments consist of the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and those Asian countries not included in the Companys other reportable operating segments. Although, each reportable operating segment provides similar hardware and software products and similar services, they are managed separately to better align with the location of the Companys customers and distribution partners and the unique market dynamics of each geographic region. Further information regarding the Companys reportable operating segments can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 11, Segment Information and Geographic Data.
Americas
The following table presents Americas net sales information for 2015, 2014 and 2013 (dollars in millions):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 93,864 | 17% | $ | 80,095 | 4% | $ | 77,093 | ||||||||||||
Percentage of total net sales |
40% | 44% | 45% |
The year-over-year growth in Americas net sales during 2015 was driven primarily by growth in net sales and unit sales of iPhone, partially offset by a decline in net sales and unit sales of iPad.
The growth in the Americas segment in 2014 was due to increased net sales of iPhone, Mac and Services that was partially offset by a decline in net sales of iPad and Other Products and weakness in foreign currencies relative to the U.S. dollar compared to 2013. iPhone growth resulted primarily from the successful introduction of iPhone 5s and 5c in September 2013 and the successful launch of iPhone 6 and 6 Plus in September 2014. Mac growth was driven primarily by increased net sales and unit sales of MacBook Air and Mac Pro.
Europe
The following table presents Europe net sales information for 2015, 2014 and 2013 (dollars in millions):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 50,337 | 14% | $ | 44,285 | 8% | $ | 40,980 | ||||||||||||
Percentage of total net sales |
22% | 24% | 24% |
The year-over-year increase in Europe net sales during 2015 was driven primarily by growth in net sales and unit sales of iPhone, partially offset by the effect of weakness in foreign currencies relative to the U.S. dollar and a decline in net sales and unit sales of iPad.
The growth in the Europe segment in 2014 was due to increased net sales of iPhone, Mac and Services, as well as strength in European currencies relative to the U.S. dollar, partially offset by a decline in net sales of iPad. iPhone growth resulted primarily from the successful introduction of iPhone 5s and 5c in the second half of calendar 2013 and the successful launch of iPhone 6 and 6 Plus in over 20 countries in Europe in September 2014. Mac growth was driven primarily by increased net sales and unit sales of MacBook Air, MacBook Pro and Mac Pro.
Apple Inc. | 2015 Form 10-K | 26
Greater China
The following table presents Greater China net sales information for 2015, 2014 and 2013 (dollars in millions):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 58,715 | 84% | $ | 31,853 | 18% | $ | 27,016 | ||||||||||||
Percentage of total net sales |
25% | 17% | 16% |
Greater China experienced strong year-over-year increases in net sales during 2015 driven primarily by iPhone sales.
The Greater China segment experienced year-over-year growth in net sales in 2014 that was significantly higher than the growth rate for the Company overall. Greater China growth was driven by higher unit sales and net sales of all major product categories, in addition to higher net sales of Services. Growth in net sales and unit sales of iPhone was especially strong, driven by the successful launch of iPhone 5s and 5c in Mainland China and Hong Kong in September 2013, the successful launch of iPhone 6 and 6 Plus in Hong Kong in September 2014, increased demand for the Companys entry-priced iPhones and the addition of a significant new carrier in the second quarter of 2014.
Japan
The following table presents Japan net sales information for 2015, 2014 and 2013 (dollars in millions):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 15,706 | 3% | $ | 15,314 | 11% | $ | 13,782 | ||||||||||||
Percentage of total net sales |
7% | 8% | 8% |
The year-over-year increase in Japan net sales during 2015 was driven primarily by growth in Services largely associated with strong App Store sales, partially offset by the effect of weakness in the Japanese yen relative to the U.S. dollar.
In 2014 the Japan segment generated year-over-year increases in net sales and unit sales of every major product category and experienced growth in net sales of Services. The year-over-year growth in iPhone was driven by the successful launch of iPhone 5s and 5c in September 2013, the successful launch of iPhone 6 and 6 Plus in September 2014, increased demand for the Companys entry-priced iPhones and the addition of a significant new carrier in the fourth quarter of 2013. These positive factors were partially offset by weakness in the Japanese Yen relative to the U.S. dollar.
Rest of Asia Pacific
The following table presents Rest of Asia Pacific net sales information for 2015, 2014 and 2013 (dollars in millions):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Net sales |
$ | 15,093 | 34% | $ | 11,248 | (7)% | $ | 12,039 | ||||||||||||
Percentage of total net sales |
6% | 6% | 7% |
The year-over-year increase in Rest of Asia Pacific net sales during 2015 primarily reflects strong growth in net sales and unit sales of iPhone, partially offset by the effect of weakness in foreign currencies relative to the U.S. dollar and a decline in net sales and unit sales of iPad.
Net sales in the Rest of Asia Pacific segment declined in 2014 compared to 2013 due to year-over-year reductions in net sales in all major product categories except Mac and reductions in unit sales of iPad. Net sales in 2014 were also negatively affected by the weakness in several foreign currencies relative to the U.S. dollar, including the Australian dollar.
Apple Inc. | 2015 Form 10-K | 27
Gross Margin
Gross margin for 2015, 2014 and 2013 is as follows (dollars in millions):
2015 | 2014 | 2013 | ||||||||||
Net sales |
$ | 233,715 | $ | 182,795 | $ | 170,910 | ||||||
Cost of sales |
140,089 | 112,258 | 106,606 | |||||||||
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Gross margin |
$ | 93,626 | $ | 70,537 | $ | 64,304 | ||||||
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Gross margin percentage |
40.1% | 38.6% | 37.6% |
The year-over-year increase in the gross margin percentage in 2015 was driven primarily by a favorable shift in mix to products with higher margins and, to a lesser extent, by improved leverage on fixed costs from higher net sales. These positive factors were partially offset primarily by higher product cost structures and, to a lesser extent, by the effect of weakness in most foreign currencies relative to the U.S. dollar.
The year-over-year increase in the gross margin percentage in 2014 was driven by multiple factors including lower commodity costs, a favorable shift in mix to products with higher margins and improved leverage on fixed costs from higher net sales, which was partially offset by the weakness in several foreign currencies relative to the U.S. dollar, price reductions on select products and higher cost structures on certain new products.
The Company anticipates gross margin during the first quarter of 2016 to be between 39% and 40%. The foregoing statement regarding the Companys expected gross margin percentage in the first quarter of 2016 is forward-looking and could differ from actual results. The Companys future gross margins can be impacted by multiple factors including, but not limited to, those set forth in Part I, Item 1A of this Form 10-K under the heading Risk Factors and those described in this paragraph. In general, the Company believes gross margins will remain under downward pressure due to a variety of factors, including continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product transitions, potential increases in the cost of components, and potential strengthening of the U.S. dollar, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Companys sales mix towards products with lower gross margins. In response to competitive pressures, the Company expects it will continue to take product pricing actions, which would adversely affect gross margins. Gross margins could also be affected by the Companys ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products. Due to the Companys significant international operations, its financial condition and operating results, including gross margins, could be significantly affected by fluctuations in exchange rates.
Operating Expenses
Operating expenses for 2015, 2014 and 2013 are as follows (dollars in millions):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Research and development |
$ | 8,067 | 34% | $ | 6,041 | 35% | $ | 4,475 | ||||||||||||
Percentage of total net sales |
3% | 3% | 3% | |||||||||||||||||
Selling, general and administrative |
$ | 14,329 | 19% | $ | 11,993 | 11% | $ | 10,830 | ||||||||||||
Percentage of total net sales |
6% | 7% | 6% | |||||||||||||||||
Total operating expenses |
$ | 22,396 | 24% | $ | 18,034 | 18% | $ | 15,305 | ||||||||||||
Percentage of total net sales |
10% | 10% | 9% |
Research and Development
The year-over-year growth in R&D expense in 2015 and 2014 was driven primarily by an increase in headcount and related expenses, including share-based compensation costs, and material costs to support expanded R&D activities. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and updated products that are central to the Companys core business strategy.
Selling, General and Administrative
The year-over-year growth in selling, general and administrative expense in 2015 and 2014 was primarily due to increased headcount and related expenses, including share-based compensation costs, and higher spending on marketing and advertising.
Apple Inc. | 2015 Form 10-K | 28
Other Income/(Expense), Net
Other income/(expense), net for 2015, 2014 and 2013 are as follows (dollars in millions):
2015 | Change | 2014 | Change | 2013 | ||||||||||||||||
Interest and dividend income |
$ | 2,921 | $ | 1,795 | $ | 1,616 | ||||||||||||||
Interest expense |
(733 | ) | (384 | ) | (136 | ) | ||||||||||||||
Other expense, net |
(903 | ) | (431 | ) | (324 | ) | ||||||||||||||
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Total other income/(expense), net |
$ | 1,285 | 31% | $ | 980 | (15)% | $ | 1,156 | ||||||||||||
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The increase in other income/(expense), net during 2015 compared to 2014 was due primarily to higher interest income, partially offset by higher expenses associated with foreign exchange activity and higher interest expense on debt. The decrease in other income and expense during 2014 compared to 2013 was due primarily to higher interest expense on debt and higher expenses associated with foreign exchange rate movements, partially offset by lower premium expenses on foreign exchange contracts and higher interest income. The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was 1.49%, 1.11% and 1.03% in 2015, 2014 and 2013, respectively.
Provision for Income Taxes
Provision for income taxes and effective tax rates for 2015, 2014 and 2013 are as follows (dollars in millions):
2015 | 2014 | 2013 | ||||||||||
Provision for income taxes |
$ | 19,121 | $ | 13,973 | $ | 13,118 | ||||||
Effective tax rate |
26.4% | 26.1% | 26.2% |
The Companys effective tax rates for 2015, 2014 and 2013 differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided when such earnings are intended to be indefinitely reinvested outside the U.S. The higher effective tax rate during 2015 compared to 2014 was due primarily to higher foreign taxes. The effective tax rate in 2014 compared to 2013 was relatively flat.
As of September 26, 2015, the Company had deferred tax assets arising from deductible temporary differences, tax losses and tax credits of $7.8 billion and deferred tax liabilities of $24.1 billion. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. The Company will continue to evaluate the realizability of deferred tax assets quarterly by assessing the need for and the amount of a valuation allowance.
The U.S. Internal Revenue Service is currently examining the years 2010 through 2012, and all years prior to 2010 are closed. In addition, the Company is subject to audits by state, local and foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing authorities. Management believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Companys tax audits are resolved in a manner not consistent with managements expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commissions assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of September 26, 2015 the Company is unable to estimate the impact.
Apple Inc. | 2015 Form 10-K | 29
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers.
The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2018. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. Accordingly, the Company may adopt the standard in either its first quarter of 2018 or 2019. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its consolidated financial statements.
Liquidity and Capital Resources
The following table presents selected financial information and statistics as of and for the years ended September 26, 2015, September 27, 2014 and September 28, 2013 (in millions):
2015 | 2014 | 2013 | ||||||||||
Cash, cash equivalents and marketable securities |
$ | 205,666 | $ | 155,239 | $ | 146,761 | ||||||
Property, plant and equipment, net |
$ | 22,471 | $ | 20,624 | $ | 16,597 | ||||||
Commercial paper |
$ | 8,499 | $ | 6,308 | $ | 0 | ||||||
Total term debt |
$ | 55,963 | $ | 28,987 | $ | 16,960 | ||||||
Working capital |
$ | 8,768 | $ | 5,083 | $ | 29,628 | ||||||
Cash generated by operating activities |
$ | 81,266 | $ | 59,713 | $ | 53,666 | ||||||
Cash used in investing activities |
$ | (56,274 | ) | $ | (22,579 | ) | $ | (33,774 | ) | |||
Cash used in financing activities |
$ | (17,716 | ) | $ | (37,549 | ) | $ | (16,379 | ) |
The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations over the next 12 months. The Company currently anticipates the cash used for future dividends, the share repurchase program and debt repayments will come from its current domestic cash, cash generated from on-going U.S. operating activities and from borrowings.
As of September 26, 2015 and September 27, 2014, the Companys cash, cash equivalents and marketable securities held by foreign subsidiaries were $186.9 billion and $137.1 billion, respectively, and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. The Companys marketable securities investment portfolio is invested primarily in highly-rated securities and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade with the objective of minimizing the potential risk of principal loss.
During 2015, cash generated from operating activities of $81.3 billion was a result of $53.4 billion of net income, non-cash adjustments to net income of $16.2 billion and an increase in the net change in operating assets and liabilities of $11.7 billion. Cash used in investing activities of $56.3 billion during 2015 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $44.4 billion and cash used to acquire property, plant and equipment of $11.2 billion. Cash used in financing activities of $17.7 billion during 2015 consisted primarily of cash used to repurchase common stock of $35.3 billion and cash used to pay dividends and dividend equivalents of $11.6 billion, partially offset by net proceeds from the issuance of term debt of $27.1 billion.
During 2014, cash generated from operating activities of $59.7 billion was a result of $39.5 billion of net income, non-cash adjustments to net income of $13.2 billion and an increase in net change in operating assets and liabilities of $7.0 billion. Cash used in investing activities of $22.6 billion during 2014 consisted primarily of cash used for purchases of marketable securities, net of sales and maturities, of $9.0 billion; cash used to acquire property, plant and equipment of $9.6 billion; and cash paid for business acquisitions, net of cash acquired, of $3.8 billion. Cash used in financing activities of $37.5 billion during 2014 consisted primarily of cash used to repurchase common stock of $45.0 billion and cash used to pay dividends and dividend equivalents of $11.1 billion, partially offset by net proceeds from the issuance of term debt and commercial paper of $12.0 billion and $6.3 billion, respectively.
Apple Inc. | 2015 Form 10-K | 30
Capital Assets
The Companys capital expenditures were $11.2 billion during 2015. The Company anticipates utilizing approximately $15.0 billion for capital expenditures during 2016, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.
Debt
In 2014, the Board of Directors authorized the Company to issue unsecured short-term promissory notes (Commercial Paper) pursuant to a commercial paper program. The Company intends to use the net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 26, 2015, the Company had $8.5 billion of Commercial Paper outstanding, with a weighted-average interest rate of 0.14% and maturities generally less than nine months.
As of September 26, 2015, the Company has outstanding floating- and fixed-rate notes for an aggregate principal amount of $55.7 billion (collectively the Notes). The Company has entered, and in the future may enter, into interest rate swaps to manage interest rate risk on the Notes. In addition, the Company has entered, and in the future may enter, into currency swaps to manage foreign currency risk on the Notes. The future principal payments for the Companys Notes as of September 26, 2015 are as follows (in millions):
2016 |
$ | 2,500 | ||
2017 |
3,500 | |||
2018 |
6,000 | |||
2019 |
3,775 | |||
2020 |
5,581 | |||
Thereafter |
34,345 | |||
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Total term debt |
$ | 55,701 | ||
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Further information regarding the Companys debt issuances and related hedging activity can be found in Part II, Item 8 of this Form 10-K in the Notes to the Consolidated Financial Statements in Note 2, Financial Instruments and Note 6, Debt.
Capital Return Program
In April 2015, the Companys Board of Directors increased the share repurchase program authorization from $90 billion to $140 billion of the Companys common stock, increasing the expected total size of the capital return program to $200 billion. The Company expects to execute the capital return program by the end of March 2017 by paying dividends and dividend equivalents, repurchasing shares and remitting withheld taxes related to net share settlement of restricted stock units. To assist in funding its capital return program, the Company expects to continue to access the debt markets, both domestically and internationally. As of September 26, 2015, $104 billion of the share repurchase program has been utilized. The Companys share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
In April 2015, the Companys Board of Directors raised the quarterly cash dividend by 11%. The Company plans to increase its dividend on an annual basis subject to declaration by the Board of Directors.
The following table presents the Companys dividends, dividend equivalents, share repurchases and net share settlement activity from the start of the capital return program in August 2012 through September 26, 2015 (in millions):
Dividends and Dividend Equivalents Paid |
Accelerated Share Repurchases |
Open Market Share Repurchases |
Taxes Related to Settlement of Equity Awards |
Total | ||||||||||||||||
2015 |
$ | 11,561 | $ | 6,000 | $ | 30,026 | $ | 1,499 | $ | 49,086 | ||||||||||
2014 |
11,126 | 21,000 | 24,000 | 1,158 | 57,284 | |||||||||||||||
2013 |
10,564 | 13,950 | 9,000 | 1,082 | 34,596 | |||||||||||||||
2012 |
2,488 | 0 | 0 | 56 | 2,544 | |||||||||||||||
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Total |
$ | 35,739 | $ | 40,950 | $ | 63,026 | $ | 3,795 | $ | 143,510 | ||||||||||
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Apple Inc. | 2015 Form 10-K | 31
Off-Balance Sheet Arrangements and Contractual Obligations
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or R&D services with the Company.
The following table presents certain payments due by the Company under contractual obligations with minimum firm commitments as of September 26, 2015, and excludes amounts already recorded on the Consolidated Balance Sheet, except for term debt (in millions):
Payments Due in Less Than 1 Year |
Payments Due in 1-3 Years |
Payments Due in 4-5 Years |
Payments Due in More Than 5 Years |
Total | ||||||||||||||||
Term debt |
$ | 2,500 | $ | 9,500 | $ | 9,356 | $ | 34,345 | $ | 55,701 | ||||||||||
Operating leases |
772 | 1,518 | 1,389 | 2,592 | 6,271 | |||||||||||||||
Purchase commitments |
29,464 | 0 | 0 | 0 | 29,464 | |||||||||||||||
Other obligations |
4,553 | 1,898 | 53 | 757 | 7,261 | |||||||||||||||
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Total |
$ | 37,289 | $ | 12,916 | $ | 10,798 | $ | 37,694 | $ | 98,697 | ||||||||||
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Operating Leases
The Companys major facility leases are typically for terms not exceeding 10 years and generally contain multi-year renewal options. As of September 26, 2015, the Company had a total of 463 retail stores. Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options. As of September 26, 2015, the Companys total future minimum lease payments under noncancelable operating leases were $6.3 billion, of which $3.6 billion related to leases for retail space.
Purchase Commitments
The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Companys products and to perform final assembly and testing of finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. As of September 26, 2015, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $29.5 billion.
Other Obligations
The Companys other off-balance sheet obligations were comprised of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to inventory prepayments, advertising, licensing, R&D, internet and telecommunications services, energy and other obligations.
The Companys other non-current liabilities in the Consolidated Balance Sheets consist primarily of deferred tax liabilities, gross unrecognized tax benefits and the related gross interest and penalties. As of September 26, 2015, the Company had non-current deferred tax liabilities of $24.1 billion. Additionally, as of September 26, 2015, the Company had gross unrecognized tax benefits of $6.9 billion and an additional $1.3 billion for gross interest and penalties classified as non-current liabilities. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table.
Indemnification
The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software infringes third-party intellectual property rights. Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim against the Company or an indemnified third-party. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss with respect to indemnification of end-users of its operating system or application software for infringement of third-party intellectual property rights. The Company did not record a liability for infringement costs related to indemnification as of September 26, 2015 or September 27, 2014.
Apple Inc. | 2015 Form 10-K | 32
In September 2015, the Company introduced the iPhone Upgrade Program, which is available to customers who purchase an iPhone 6s and 6s Plus in one of its U.S. physical retail stores and activate the purchased iPhone with one of the four national carriers. The iPhone Upgrade Program provides customers the right to trade in that iPhone for a new iPhone, provided certain conditions are met. One of the conditions of this program requires the customer to finance the initial purchase price of the iPhone with a third-party lender. Upon exercise of the trade-in right and purchase of a new iPhone, the Company satisfies the customers outstanding balance due to the third-party lender on the original device. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net of the fair value of such right with subsequent changes to the guarantee liability recognized within revenue.
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.
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 Companys discussion and analysis of its financial condition and operating results require the Companys management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Companys 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 Companys critical accounting policies and estimates are those related to revenue recognition, valuation and impairment of marketable securities, inventory valuation and valuation of manufacturing-related assets and estimated purchase commitment cancellation fees, warranty costs, income taxes, and legal and other contingencies. Management considers these policies critical because they are both important to the portrayal of the Companys financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Companys senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Companys Board of Directors.
Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Companys product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. For payment terms in excess of the Companys standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
For multi-element arrangements that include hardware products containing software essential to the hardware products functionality, undelivered software elements that relate to the hardware products essential software and/or undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE) and (iii) best estimate of selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Companys best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.
Apple Inc. | 2015 Form 10-K | 33
For sales of qualifying versions of iOS devices, Mac, Apple Watch and Apple TV, the Company has indicated it may from time to time provide future unspecified software upgrades to the devices essential software and/or non-software services free of charge. Because the Company has neither VSOE nor TPE for the unspecified software upgrade rights or the non-software services, revenue is allocated to these rights and services based on the Companys ESPs. Revenue allocated to the unspecified software upgrade rights and non-software services based on the Companys ESPs is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided.
The Companys process for determining ESPs involves managements 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 Companys ESPs and the future rate of related amortization for unspecified software upgrades and non-software services related to future sales of these devices could change. Factors subject to change include the unspecified software upgrade rights and non-software services offered, the estimated value of unspecified software upgrade rights and non-software services and the estimated period unspecified software upgrades and non-software services are expected to be provided.
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated and the other conditions for revenue recognition have been met. The Companys policy requires that, if refunds cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the price protection lapses. For the Companys other customer incentive programs, the estimated cost is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Companys historical experience. Future market conditions and product transitions may require the Company to increase customer incentive programs that could result in reductions to future revenue. Additionally, certain customer incentive programs require management to estimate the number of customers who will actually redeem the incentive. Managements estimates are based on historical experience and the specific terms and conditions of particular incentive programs. If a greater than estimated proportion of customers redeems such incentives, the Company would be required to record additional reductions to revenue, which would have an adverse impact on the Companys operating results.
Valuation and Impairment of Marketable Securities
The Companys investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of securities are recognized in accumulated other comprehensive income, net of tax, in the Companys Consolidated Balance Sheets. Changes in the fair value of available-for-sale securities impact the Companys net income only when such securities are sold or an other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of each securitys cost basis. The Company regularly reviews its investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Companys intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. The Companys assessment on whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security, which would have an adverse impact on the Companys operating results.
Inventory Valuation and Valuation of Manufacturing-Related Assets and Estimated Purchase Commitment Cancellation Fees
The Company must purchase components and build inventory in advance of product shipments and has invested in manufacturing-related assets, including capital assets held at its suppliers facilities. In addition, the Company has made prepayments to certain of its suppliers associated with long-term supply agreements to secure supply of inventory components. The Company records a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company performs a detailed review of inventory that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels and component cost trends. The Company also reviews its manufacturing-related capital assets and inventory prepayments for impairment whenever events or circumstances indicate the carrying amount of such assets may not be recoverable. If the Company determines that an asset is not recoverable, it records an impairment loss equal to the amount by which the carrying value of such an asset exceeds its fair value.
The industries in which the Company competes are subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. In certain circumstances the Company may be required to record additional write-downs of inventory and/or manufacturing-related assets. These circumstances include future demand or market conditions for the Companys products being less favorable than forecasted, unforeseen technological changes or changes to the Companys product development plans that negatively impact the utility of any of these assets, or significant deterioration in the financial condition of one or more of the Companys suppliers that hold any of the Companys manufacturing-related assets or to whom the Company has made an inventory prepayment. Such write-downs would adversely affect the Companys financial condition and operating results in the period when the write-downs were recorded.
Apple Inc. | 2015 Form 10-K | 34
The Company accrues for estimated cancellation fees related to inventory orders that have been cancelled or are expected to be cancelled. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders in each case based on projected demand. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. Purchase commitments typically cover the Companys forecasted component and manufacturing requirements for periods up to 150 days. If there is an abrupt and substantial decline in demand for one or more of the Companys products, a change in the Companys product development plans, or an unanticipated change in technological requirements for any of the Companys products, the Company may be required to record additional accruals for cancellation fees that would adversely affect its results of operations in the period when the cancellation fees are identified and recorded.
Warranty Costs
The Company accrues for the estimated cost of warranties at the time the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost-per-claim and knowledge of specific product failures that are outside of the Companys typical experience. The Company regularly reviews these estimates to assess the adequacy of its recorded warranty liabilities or the current installed base of products subject to warranty protection and adjusts the amounts as necessary. If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liabilities would be required and could materially affect the Companys financial condition and operating results.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of its reported operating results. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company will record an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with managements expectations could have a material impact on the Companys 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. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of managements expectations, the Companys consolidated financial statements for that reporting period could be materially adversely affected.
Apple Inc. | 2015 Form 10-K | 35
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange forward and option positions and interest rate swaps, both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures. Given the effective horizons of the Companys 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 Companys financial condition and operating results.
Interest Rate Risk
The Companys exposure to changes in interest rates relates primarily to the Companys investment portfolio and outstanding debt. While the Company is exposed to global interest rate fluctuations, the Companys 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 Companys 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 Companys debt.
The Companys investment policy and strategy are focused on preservation of capital and supporting the Companys liquidity requirements. The Company uses a combination of internal and external management to execute its investment strategy and achieve its investment objectives. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of minimizing the potential risk of principal loss. To provide a meaningful assessment of the interest rate risk associated with the Companys investment portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 26, 2015 and September 27, 2014, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $4.3 billion and $3.4 billion incremental decline in the fair market value of the portfolio, respectively. Such losses would only be realized if the Company sold the investments prior to maturity.
As of September 26, 2015 and September 27, 2014, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate carrying amount of $56.0 billion and $29.0 billion, respectively. The Company has entered, and may enter in the future, into interest rate swaps to manage interest rate risk on its outstanding term debt. Interest rate swaps allow the Company to effectively convert fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. Gains and losses on these instruments are generally offset by the corresponding losses and gains on the related hedging instrument. A 100 basis point increase in market interest rates would cause interest expense on the Companys debt as of September 26, 2015 and September 27, 2014 to increase by $200 million and $110 million on an annualized basis, respectively.
Further details regarding the Companys debt is provided in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, Debt.
Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the Companys net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust local currency product pricing due to competitive pressures when there have been significant volatility in foreign currency exchange rates.
The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. In addition, the Company has entered, and may enter in the future, into non-designated foreign currency contracts to partially offset the foreign currency exchange gains and losses on its foreign-denominated debt issuances. The Companys practice is to hedge a portion of its material foreign exchange exposures, typically for up to 12 months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to accounting considerations and the prohibitive economic cost of hedging particular exposures.
Apple Inc. | 2015 Form 10-K | 36
To provide a meaningful assessment of the foreign currency risk associated with certain of the Companys 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 Companys foreign currency derivative positions due to adverse movements in rates. The VAR model is not intended to represent actual losses but is used as a risk estimation and management tool. The model assumes normal market conditions. Forecasted transactions, firm commitments and assets and liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company estimates with 95% confidence a maximum one-day loss in fair value of $342 million as of September 26, 2015 compared to a maximum one-day loss in fair value of $240 million as of September 27, 2014. Because the Company uses foreign currency instruments for hedging purposes, the loss in fair value incurred on those instruments are generally offset by increases in the fair value of the underlying exposures.
Actual future gains and losses associated with the Companys investment portfolio and derivative positions may differ materially from the sensitivity analyses performed as of September 26, 2015 due to the inherent limitations associated with predicting the timing and amount of changes in interest rates, foreign currency exchanges rates and the Companys actual exposures and positions.
Apple Inc. | 2015 Form 10-K | 37
Item 8. | Financial Statements and Supplementary Data |
Page | ||||
39 | ||||
40 | ||||
Consolidated Balance Sheets as of September 26, 2015 and September 27, 2014 |
41 | |||
42 | ||||
43 | ||||
44 | ||||
68 | ||||
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm |
69 |
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Apple Inc. | 2015 Form 10-K | 38
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
Years ended | ||||||||||||
September 26, 2015 |
September 27, 2014 |
September 28, 2013 |
||||||||||
Net sales |
$ | 233,715 | $ | 182,795 | $ | 170,910 | ||||||
Cost of sales |
140,089 | 112,258 | 106,606 | |||||||||
|
|
|
|
|
|
|||||||
Gross margin |
93,626 | 70,537 | 64,304 | |||||||||
|
|
|
|
|
|
|||||||
Operating expenses: |
||||||||||||
Research and development |
8,067 | 6,041 | 4,475 | |||||||||
Selling, general and administrative |
14,329 | 11,993 | 10,830 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
22,396 | 18,034 | 15,305 | |||||||||
|
|
|
|
|
|
|||||||
Operating income |
71,230 | 52,503 | 48,999 | |||||||||
Other income/(expense), net |
1,285 | 980 | 1,156 | |||||||||
|
|
|
|
|
|
|||||||
Income before provision for income taxes |
72,515 | 53,483 | 50,155 | |||||||||
Provision for income taxes |
19,121 | 13,973 | 13,118 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 53,394 | $ | 39,510 | $ | 37,037 | ||||||
|
|
|
|
|
|
|||||||
Earnings per share: |
||||||||||||
Basic |
$ | 9.28 | $ | 6.49 | $ | 5.72 | ||||||
Diluted |
$ | 9.22 | $ | 6.45 | $ | 5.68 | ||||||
Shares used in computing earnings per share: |
||||||||||||
Basic |
5,753,421 | 6,085,572 | 6,477,320 | |||||||||
Diluted |
5,793,069 | 6,122,663 | 6,521,634 | |||||||||
Cash dividends declared per share |
$ | 1.98 | $ | 1.82 | $ | 1.64 |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 39
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Years ended | ||||||||||||
September 26, 2015 |
September 27, 2014 |
September 28, 2013 |
||||||||||
Net income |
$ | 53,394 | $ | 39,510 | $ | 37,037 | ||||||
|
|
|
|
|
|
|||||||
Other comprehensive income/(loss): |
||||||||||||
Change in foreign currency translation, net of tax effects of $201, $50 and $35, respectively |
(411 | ) | (137 | ) | (112 | ) | ||||||
Change in unrealized gains/losses on derivative instruments: |
||||||||||||
Change in fair value of derivatives, net of tax benefit/(expense) of $(441), $(297) and $(351), respectively |
2,905 | 1,390 | 522 | |||||||||
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $630, $(36) and $255, respectively |
(3,497 | ) | 149 | (458 | ) | |||||||
|
|
|
|
|
|
|||||||
Total change in unrealized gains/losses on derivative instruments, net of tax |
(592 | ) | 1,539 | 64 | ||||||||
|
|
|
|
|
|
|||||||
Change in unrealized gains/losses on marketable securities: |
||||||||||||
Change in fair value of marketable securities, net of tax benefit/(expense) of $264, $(153) and $458, respectively |
(483 | ) | 285 | (791 | ) | |||||||
Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(32), $71 and $82, respectively |
59 | (134 | ) | (131 | ) | |||||||
|
|
|
|
|
|
|||||||
Total change in unrealized gains/losses on marketable securities, net of tax |
(424 | ) | 151 | (922 | ) | |||||||
|
|
|
|
|
|
|||||||
Total other comprehensive income/(loss) |
(1,427 | ) | 1,553 | (970 | ) | |||||||
|
|
|
|
|
|
|||||||
Total comprehensive income |
$ | 51,967 | $ | 41,063 | $ | 36,067 | ||||||
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 40
(In millions, except number of shares which are reflected in thousands and par value)
September 26, 2015 |
September 27, 2014 |
|||||||
ASSETS: |
| |||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 21,120 | $ | 13,844 | ||||
Short-term marketable securities |
20,481 | 11,233 | ||||||
Accounts receivable, less allowances of $82 and $86, respectively |
16,849 | 17,460 | ||||||
Inventories |
2,349 | 2,111 | ||||||
Deferred tax assets |
5,546 | 4,318 | ||||||
Vendor non-trade receivables |
13,494 | 9,759 | ||||||
Other current assets |
9,539 | 9,806 | ||||||
|
|
|
|
|||||
Total current assets |
89,378 | 68,531 | ||||||
Long-term marketable securities |
164,065 | 130,162 | ||||||
Property, plant and equipment, net |
22,471 | 20,624 | ||||||
Goodwill |
5,116 | 4,616 | ||||||
Acquired intangible assets, net |
3,893 | 4,142 | ||||||
Other assets |
5,556 | 3,764 | ||||||
|
|
|
|
|||||
Total assets |
$ | 290,479 | $ | 231,839 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY: |
| |||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 35,490 | $ | 30,196 | ||||
Accrued expenses |
25,181 | 18,453 | ||||||
Deferred revenue |
8,940 | 8,491 | ||||||
Commercial paper |
8,499 | 6,308 | ||||||
Current portion of long-term debt |
2,500 | 0 | ||||||
|
|
|
|
|||||
Total current liabilities |
80,610 | 63,448 | ||||||
Deferred revenue, non-current |
3,624 | 3,031 | ||||||
Long-term debt |
53,463 | 28,987 | ||||||
Other non-current liabilities |
33,427 | 24,826 | ||||||
|
|
|
|
|||||
Total liabilities |
171,124 | 120,292 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 5,578,753 and 5,866,161 shares issued and outstanding, respectively |
27,416 | 23,313 | ||||||
Retained earnings |
92,284 | 87,152 | ||||||
Accumulated other comprehensive income |
(345 | ) | 1,082 | |||||
|
|
|
|
|||||
Total shareholders equity |
119,355 | 111,547 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 290,479 | $ | 231,839 | ||||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 41
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In millions, except number of shares which are reflected in thousands)
Common Stock and Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income/(Loss) |
Total Shareholders Equity |
|||||||||||||||||
Shares | Amount | |||||||||||||||||||
Balances as of September 29, 2012 |
6,574,458 | $ | 16,422 | $ | 101,289 | $ | 499 | $ | 118,210 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
0 | 0 | 37,037 | 0 | 37,037 | |||||||||||||||
Other comprehensive income/(loss) |
0 | 0 | 0 | (970 | ) | (970 | ) | |||||||||||||
Dividends and dividend equivalents declared |
0 | 0 | (10,676 | ) | 0 | (10,676 | ) | |||||||||||||
Repurchase of common stock |
(328,837 | ) | 0 | (22,950 | ) | 0 | (22,950 | ) | ||||||||||||
Share-based compensation |
0 | 2,253 | 0 | 0 | 2,253 | |||||||||||||||
Common stock issued, net of shares withheld for employee taxes |
48,873 | (143 | ) | (444 | ) | 0 | (587 | ) | ||||||||||||
Tax benefit from equity awards, including transfer pricing adjustments |
0 | 1,232 | 0 | 0 | 1,232 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balances as of September 28, 2013 |
6,294,494 | 19,764 | 104,256 | (471 | ) | 123,549 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
0 | 0 | 39,510 | 0 | 39,510 | |||||||||||||||
Other comprehensive income/(loss) |
0 | 0 | 0 | 1,553 | 1,553 | |||||||||||||||
Dividends and dividend equivalents declared |
0 | 0 | (11,215 | ) | 0 | (11,215 | ) | |||||||||||||
Repurchase of common stock |
(488,677 | ) | 0 | (45,000 | ) | 0 | (45,000 | ) | ||||||||||||
Share-based compensation |
0 | 2,863 | 0 | 0 | 2,863 | |||||||||||||||
Common stock issued, net of shares withheld for employee taxes |
60,344 | (49 | ) | (399 | ) | 0 | (448 | ) | ||||||||||||
Tax benefit from equity awards, including transfer pricing adjustments |
0 | 735 | 0 | 0 | 735 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balances as of September 27, 2014 |
5,866,161 | 23,313 | 87,152 | 1,082 | 111,547 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
0 | 0 | 53,394 | 0 | 53,394 | |||||||||||||||
Other comprehensive income/(loss) |
0 | 0 | 0 | (1,427 | ) | (1,427 | ) | |||||||||||||
Dividends and dividend equivalents declared |
0 | 0 | (11,627 | ) | 0 | (11,627 | ) | |||||||||||||
Repurchase of common stock |
(325,032 | ) | 0 | (36,026 | ) | 0 | (36,026 | ) | ||||||||||||
Share-based compensation |
0 | 3,586 | 0 | 0 | 3,586 | |||||||||||||||
Common stock issued, net of shares withheld for employee taxes |
37,624 | (231 | ) | (609 | ) | 0 | (840 | ) | ||||||||||||
Tax benefit from equity awards, including transfer pricing adjustments |
0 | 748 | 0 | 0 | 748 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balances as of September 26, 2015 |
5,578,753 | $ | 27,416 | $ | 92,284 | $ | (345 | ) | $ | 119,355 | ||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 42
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years ended | ||||||||||||
September 26, 2015 |
September 27, 2014 |
September 28, 2013 |
||||||||||
Cash and cash equivalents, beginning of the year |
$ | 13,844 | $ | 14,259 | $ | 10,746 | ||||||
|
|
|
|
|
|
|||||||
Operating activities: |
||||||||||||
Net income |
53,394 | 39,510 | 37,037 | |||||||||
Adjustments to reconcile net income to cash generated by operating activities: |
||||||||||||
Depreciation and amortization |
11,257 | 7,946 | 6,757 | |||||||||
Share-based compensation expense |
3,586 | 2,863 | 2,253 | |||||||||
Deferred income tax expense |
1,382 | 2,347 | 1,141 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable, net |
611 | (4,232 | ) | (2,172 | ) | |||||||
Inventories |
(238 | ) | (76 | ) | (973 | ) | ||||||
Vendor non-trade receivables |
(3,735 | ) | (2,220 | ) | 223 | |||||||
Other current and non-current assets |
(179 | ) | 167 | 1,080 | ||||||||
Accounts payable |
5,400 | 5,938 | 2,340 | |||||||||
Deferred revenue |
1,042 | 1,460 | 1,459 | |||||||||
Other current and non-current liabilities |
8,746 | 6,010 | 4,521 | |||||||||
|
|
|
|
|
|
|||||||
Cash generated by operating activities |
81,266 | 59,713 | 53,666 | |||||||||
|
|
|
|
|
|
|||||||
Investing activities: |
||||||||||||
Purchases of marketable securities |
(166,402 | ) | (217,128 | ) | (148,489 | ) | ||||||
Proceeds from maturities of marketable securities |
14,538 | 18,810 | 20,317 | |||||||||
Proceeds from sales of marketable securities |
107,447 | 189,301 | 104,130 | |||||||||
Payments made in connection with business acquisitions, net |
(343 | ) | (3,765 | ) | (496 | ) | ||||||
Payments for acquisition of property, plant and equipment |
(11,247 | ) | (9,571 | ) | (8,165 | ) | ||||||
Payments for acquisition of intangible assets |
(241 | ) | (242 | ) | (911 | ) | ||||||
Other |
(26 | ) | 16 | (160 | ) | |||||||
|
|
|
|
|
|
|||||||
Cash used in investing activities |
(56,274 | ) | (22,579 | ) | (33,774 | ) | ||||||
|
|
|
|
|
|
|||||||
Financing activities: |
||||||||||||
Proceeds from issuance of common stock |
543 | 730 | 530 | |||||||||
Excess tax benefits from equity awards |
749 | 739 | 701 | |||||||||
Taxes paid related to net share settlement of equity awards |
(1,499 | ) | (1,158 | ) | (1,082 | ) | ||||||
Dividends and dividend equivalents paid |
(11,561 | ) | (11,126 | ) | (10,564 | ) | ||||||
Repurchase of common stock |
(35,253 | ) | (45,000 | ) | (22,860 | ) | ||||||
Proceeds from issuance of term debt, net |
27,114 | 11,960 | 16,896 | |||||||||
Change in commercial paper, net |
2,191 | 6,306 | 0 | |||||||||
|
|
|
|
|
|
|||||||
Cash used in financing activities |
(17,716 | ) | (37,549 | ) | (16,379 | ) | ||||||
|
|
|
|
|
|
|||||||
Increase/(decrease) in cash and cash equivalents |
7,276 | (415 | ) | 3,513 | ||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, end of the year |
$ | 21,120 | $ | 13,844 | $ | 14,259 | ||||||
|
|
|
|
|
|
|||||||
Supplemental cash flow disclosure: |
||||||||||||
Cash paid for income taxes, net |
$ | 13,252 | $ | 10,026 | $ | 9,128 | ||||||
Cash paid for interest |
$ | 514 | $ | 339 | $ | 0 |
See accompanying Notes to Consolidated Financial Statements.
Apple Inc. | 2015 Form 10-K | 43
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Apple Inc. and its wholly-owned subsidiaries (collectively Apple or the Company) designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. The Company sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, the Company sells a variety of third-party Apple-compatible products, including application software and various accessories through its online and retail stores. The Company sells to consumers, small and mid-sized businesses and education, enterprise and government customers.
Basis of Presentation and Preparation
The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. In the opinion of the Companys management, the consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
The Companys fiscal year is the 52 or 53-week period that ends on the last Saturday of September. The Companys fiscal years 2015, 2014 and 2013 ended on September 26, 2015, September 27, 2014 and September 28, 2013, respectively. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal quarters with calendar quarters. Fiscal years 2015, 2014 and 2013 each spanned 52 weeks. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Companys fiscal years ended in September and the associated quarters, months and periods of those fiscal years.
Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Companys product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. For payment terms in excess of the Companys standard payment terms, revenue is recognized as payments become due unless the Company has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
For the sale of most third-party products, the Company recognizes revenue based on the gross amount billed to customers because the Company establishes its own pricing for such products, retains related inventory risk for physical products, is the primary obligor to the customer and assumes the credit risk for amounts billed to its customers. For third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, the Company does not determine the selling price of the products and is not the primary obligor to the customer. Therefore, the Company accounts for such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that is remitted by the Company to third-party app developers and certain digital content owners is not reflected in the Companys Consolidated Statements of Operations.
Apple Inc. | 2015 Form 10-K | 44
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts that have been deferred for unspecified and specified software upgrade rights and non-software services that are attached to hardware and software products. The Company sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on iTunes Store, App Store, Mac App Store and iBooks Store for the purchase of digital content and software. The Company records deferred revenue upon the sale of the card, which is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods. AppleCare service and support contracts typically include extended phone support, repair services, web-based support resources and diagnostic tools offered under the Companys standard limited warranty.
The Company records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded. For the Companys other customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Companys historical experience. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements that include hardware products containing software essential to the hardware products functionality, undelivered software elements that relate to the hardware products essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE) and (iii) best estimate of selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Companys best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element arrangements accounted for in accordance with industry specific software accounting guidance, the Company allocates revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
For sales of qualifying versions of iPhone, iPad and iPod touch (iOS devices), Mac, Apple Watch and Apple TV, the Company has indicated it may from time to time provide future unspecified software upgrades to the devices essential software and/or non-software services free of charge. The Company has identified up to three deliverables regularly included in arrangements involving the sale of these devices. The first deliverable, which represents the substantial portion of the allocated sales price, is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with qualifying devices to receive on a when-and-if-available basis, future unspecified software upgrades relating to the products essential software. The third deliverable is the non-software services to be provided to qualifying devices. The Company allocates revenue between these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based on the Companys ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale provided the other conditions for revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and the non-software services is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating expenses as incurred.
The Companys process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable including, where applicable, prices charged by the Company and market trends in the pricing for similar offerings, product specific business objectives, length of time a particular version of a device has been available, estimated cost to provide the non-software services and the relative ESP of the upgrade rights and non-software services as compared to the total selling price of the product.
Beginning in September 2015, the Company reduced the combined ESPs for iOS devices and Mac between $5 and $10 to reflect the increase in competitive offers for similar products at little to no cost for users, which reduces the amount the Company could reasonably charge for these deliverables on a standalone basis.
Shipping Costs
Amounts billed to customers related to shipping and handling are classified as revenue, and the Companys shipping and handling costs are classified as cost of sales.
Apple Inc. | 2015 Form 10-K | 45
Warranty Costs
The Company generally provides for the estimated cost of hardware and software warranties at the time the related revenue is recognized. The Company assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates.
Software Development Costs
Research and development (R&D) costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a products technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Companys products are released soon after technological feasibility has been established and as a result software development costs were expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expense was $1.8 billion, $1.2 billion and $1.1 billion for 2015, 2014 and 2013, respectively.
Share-based Compensation
The Company recognizes expense related to share-based payment transactions in which it receives employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Companys equity instruments or that may be settled by the issuance of such equity instruments. Share-based compensation cost for restricted stock and restricted stock units (RSUs) is measured based on the closing fair market value of the Companys common stock on the date of grant. The Company recognizes share-based compensation cost over the awards requisite service period on a straight-line basis for time-based RSUs and on a graded basis for RSUs that are contingent on the achievement of performance conditions. The Company recognizes a benefit from share-based compensation in the Consolidated Statements of Shareholders Equity if an excess tax benefit is realized. In addition, the Company recognizes the indirect effects of share-based compensation on R&D tax credits, foreign tax credits and domestic manufacturing deductions in the Consolidated Statements of Operations. Further information regarding share-based compensation can be found in Note 9, Benefit Plans.
Income Taxes
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 5, Income Taxes for additional information.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Companys employee stock purchase plan, unvested restricted stock and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Companys common stock can result in a greater dilutive effect from potentially dilutive securities.
Apple Inc. | 2015 Form 10-K | 46
The following table shows the computation of basic and diluted earnings per share for 2015, 2014 and 2013 (net income in millions and shares in thousands):
2015 | 2014 | 2013 | ||||||||||
Numerator: |
||||||||||||
Net income |
$ | 53,394 | $ | 39,510 | $ | 37,037 | ||||||
Denominator: |
||||||||||||
Weighted-average shares outstanding |
5,753,421 | 6,085,572 | 6,477,320 | |||||||||
Effect of dilutive securities |
39,648 | 37,091 | 44,314 | |||||||||
|
|
|
|
|
|
|||||||
Weighted-average diluted shares |
5,793,069 | 6,122,663 | 6,521,634 | |||||||||
|
|
|
|
|
|
|||||||
Basic earnings per share |
$ | 9.28 | $ | 6.49 | $ | 5.72 | ||||||
Diluted earnings per share |
$ | 9.22 | $ | 6.45 | $ | 5.68 |
Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share.
Financial Instruments
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Companys marketable debt and equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the classifications at each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based on each instruments underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term. Marketable equity securities, including mutual funds, are classified as either short-term or long-term based on the nature of each security and its availability for use in current operations. The Companys marketable debt and equity securities are carried at fair value, with unrealized gains and losses, net of taxes, reported as a component of accumulated other comprehensive income (AOCI) in shareholders equity, with the exception of unrealized losses believed to be other-than-temporary which are reported in earnings in the current period. The cost of securities sold is based upon the specific identification method.
Derivative Financial Instruments
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI in shareholders equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in earnings in the current period. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.
For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges, both the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings in the current period.
For derivative instruments and foreign currency debt that hedge the exposure to changes in foreign currency exchange rates used for translation of the net investment in a foreign operation and that are designated as a net investment hedge, the net gain or loss on the effective portion of the derivative instrument is reported in the same manner as a foreign currency translation adjustment. For forward exchange contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this forward carry component are recognized in earnings in the current period.
Derivatives that do not qualify as hedges are adjusted to fair value through earnings in the current period.
Apple Inc. | 2015 Form 10-K | 47
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors, including historical experience, age of the accounts receivable balances, credit quality of the Companys customers, current economic conditions and other factors that may affect the customers ability to pay.
Inventories
Inventories are stated at the lower of cost, computed using the first-in, first-out method and net realizable value. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of September 26, 2015 and September 27, 2014, the Companys inventories consist primarily of finished goods.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building; between one to five years for machinery and equipment, including product tooling and manufacturing process equipment; and the shorter of lease terms or ten years for leasehold improvements. The Company capitalizes eligible costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to internal-use software are amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Depreciation and amortization expense on property and equipment was $9.2 billion, $6.9 billion and $5.8 billion during 2015, 2014 and 2013, respectively.
Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets
The Company reviews property, plant and equipment, inventory component prepayments and certain identifiable intangibles, excluding goodwill, for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property, plant and equipment, inventory component prepayments and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value.
The Company does not amortize goodwill and intangible assets with indefinite useful lives, rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its goodwill and intangible asset impairment tests in the fourth quarter of each year. The Company did not recognize any impairment charges related to goodwill or indefinite lived intangible assets during 2015, 2014 and 2013. The Company established reporting units based on its current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit. In 2015 and 2014, the Companys goodwill was primarily allocated to the Americas and Europe reporting units.
The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The Company typically amortizes its acquired intangible assets with definite useful lives over periods from three to seven years.
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Inputs that are generally unobservable and typically reflect managements estimate of assumptions that market participants would use in pricing the asset or liability.
Apple Inc. | 2015 Form 10-K | 48
The Companys valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of the Companys debt instruments and all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments.
Foreign Currency Translation and Remeasurement
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in AOCI in shareholders equity. The Companys subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates.
Note 2 Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables show the Companys cash and available-for-sale securities adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short- or long-term marketable securities as of September 26, 2015 and September 27, 2014 (in millions):
2015 | ||||||||||||||||||||||||||||
Adjusted Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
Cash and Cash Equivalents |
Short-Term Marketable Securities |
Long-Term Marketable Securities |
||||||||||||||||||||||
Cash |
$ | 11,389 | $ | 0 | $ | 0 | $ | 11,389 | $ | 11,389 | $ | 0 | $ | 0 | ||||||||||||||
Level 1: |
||||||||||||||||||||||||||||
Money market funds |
1,798 | 0 | 0 | 1,798 | 1,798 | 0 | 0 | |||||||||||||||||||||
Mutual funds |
1,772 | 0 | (144 | ) | 1,628 | 0 | 1,628 | 0 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Subtotal |
3,570 | 0 | (144 | ) | 3,426 | 1,798 | 1,628 | 0 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Level 2: |
||||||||||||||||||||||||||||
U.S. Treasury securities |
34,902 | 181 | (1 | ) | 35,082 | 0 | 3,498 | 31,584 | ||||||||||||||||||||
U.S. agency securities |
5,864 | 14 | 0 | 5,878 | 841 | 767 | 4,270 | |||||||||||||||||||||
Non-U.S. government securities |
6,356 | 45 | (167 | ) | 6,234 | 43 | 135 | 6,056 | ||||||||||||||||||||
Certificates of deposit and time deposits |
4,347 | 0 | 0 | 4,347 | 2,065 | 1,405 | 877 | |||||||||||||||||||||
Commercial paper |
6,016 | 0 | 0 | 6,016 | 4,981 | 1,035 | 0 | |||||||||||||||||||||
Corporate securities |
116,908 | 242 | (985 | ) | 116,165 | 3 | 11,948 | 104,214 | ||||||||||||||||||||
Municipal securities |
947 | 5 | 0 | 952 | 0 | 48 | 904 | |||||||||||||||||||||
Mortgage- and asset-backed securities |
16,121 | 87 | (31 | ) | 16,177 | 0 | 17 | 16,160 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Subtotal |
191,461 | 574 | (1,184 | ) | 190,851 | 7,933 | 18,853 | 164,065 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 206,420 | $ | 574 | $ | (1,328 | ) | $ | 205,666 | $ | 21,120 | $ | 20,481 | $ | 164,065 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apple Inc. | 2015 Form 10-K | 49
2014 | ||||||||||||||||||||||||||||
Adjusted Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
Cash and Cash Equivalents |
Short-Term Marketable Securities |
Long-Term Marketable Securities |
||||||||||||||||||||||
Cash |
$ | 10,232 | $ | 0 | $ | 0 | $ | 10,232 | $ | 10,232 | $ | 0 | $ | 0 | ||||||||||||||
Level 1: |
||||||||||||||||||||||||||||
Money market funds |
1,546 | 0 | 0 | 1,546 | 1,546 | 0 | 0 | |||||||||||||||||||||
Mutual funds |
2,531 | 1 | (132 | ) | 2,400 | 0 | 2,400 | 0 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Subtotal |
4,077 | 1 | (132 | ) | 3,946 | 1,546 | 2,400 | 0 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Level 2: |
||||||||||||||||||||||||||||
U.S. Treasury securities |
23,140 | 15 | (9 | ) | 23,146 | 12 | 607 | 22,527 | ||||||||||||||||||||
U.S. agency securities |
7,373 | 3 | (11 | ) | 7,365 | 652 | 157 | 6,556 | ||||||||||||||||||||
Non-U.S. government securities |
6,925 | 69 | (69 | ) | 6,925 | 0 | 204 | 6,721 | ||||||||||||||||||||
Certificates of deposit and time deposits |
3,832 | 0 | 0 | 3,832 | 1,230 | 1,233 | 1,369 | |||||||||||||||||||||
Commercial paper |
475 | 0 | 0 | 475 | 166 | 309 | 0 | |||||||||||||||||||||
Corporate securities |
85,431 | 296 | (241 | ) | 85,486 | 6 | 6,298 | 79,182 | ||||||||||||||||||||
Municipal securities |
940 | 8 | 0 | 948 | 0 | 0 | 948 | |||||||||||||||||||||
Mortgage- and asset-backed securities |
12,907 | 26 | (49 | ) | 12,884 | 0 | 25 | 12,859 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Subtotal |
141,023 | 417 | (379 | ) | 141,061 | 2,066 | 8,833 | 130,162 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 155,332 | $ | 418 | $ | (511 | ) | $ | 155,239 | $ | 13,844 | $ | 11,233 | $ | 130,162 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Companys long-term marketable securities generally range from one to five years.
As of September 26, 2015, the Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Companys intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investments cost basis.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investments in certain foreign subsidiaries and on certain existing assets and liabilities. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.
To help protect gross margins from fluctuations in foreign currency exchange rates, certain of the Companys subsidiaries whose functional currency is the U.S. dollar may hedge a portion of forecasted foreign currency revenue, and subsidiaries whose functional currency is not the U.S. dollar and who sell in local currencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries functional currencies. The Company may enter into forward contracts, option contracts or other instruments to manage this risk and may designate these instruments as cash flow hedges. The Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases, typically for up to 12 months.
To help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company may enter into foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. In addition, the Company may use non-derivative financial instruments, such as its foreign currency-denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. In both of these cases, the Company designates these instruments as net investment hedges.
Apple Inc. | 2015 Form 10-K | 50
The Company may also enter into non-designated foreign currency contracts to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies.
The Company may enter into interest rate swaps, options, or other instruments to manage interest rate risk. These instruments may offset a portion of changes in income or expense, or changes in fair value of the Companys term debt or investments. The Company designates these instruments as either cash flow or fair value hedges. The Companys hedged interest rate transactions as of September 26, 2015 are expected to be recognized within 10 years.
Cash Flow Hedges
The effective portions of cash flow hedges are recorded in AOCI until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases are recognized as a component of cost of sales in the same period as the related costs are recognized. Deferred gains and losses associated with cash flow hedges of interest income or expense are recognized in other income/(expense), net in the same period as the related income or expense is recognized. The ineffective portions and amounts excluded from the effectiveness testing of cash flow hedges are recognized in other income/(expense), net.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in AOCI associated with such derivative instruments are reclassified immediately into other income/(expense), net. Any subsequent changes in fair value of such derivative instruments are reflected in other income/(expense), net unless they are re-designated as hedges of other transactions.
Net Investment Hedges
The effective portions of net investment hedges are recorded in other comprehensive income (OCI) as a part of the cumulative translation adjustment. The ineffective portions and amounts excluded from the effectiveness testing of net investment hedges are recognized in other income/(expense), net.
Fair Value Hedges
Gains and losses related to changes in fair value hedges are recognized in earnings along with a corresponding loss or gain related to the change in value of the underlying hedged item.
Non-Designated Derivatives
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in the financial statement line item to which the derivative relates.
The Company records all derivatives in the Consolidated Balance Sheets at fair value. The Companys accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Companys derivative instruments at gross fair value as of September 26, 2015 and September 27, 2014 (in millions):
2015 | |||||||||||||||
Fair Value of Derivatives Designated as Hedge Instruments |
Fair Value of Derivatives Not Designated as Hedge Instruments |
Total Fair Value | |||||||||||||
Derivative assets (1): |
|||||||||||||||
Foreign exchange contracts |
$ | 1,442 | $ | 109 | $ | 1,551 | |||||||||
Interest rate contracts |
$ | 394 | $ | 0 | $ | 394 | |||||||||
Derivative liabilities (2): |
|||||||||||||||
Foreign exchange contracts |
$ | 905 | $ | 94 | $ | 999 | |||||||||
Interest rate contracts |
$ | 13 | $ | 0 | $ | 13 |
Apple Inc. | 2015 Form 10-K | 51
2014 | |||||||||||||||||
Fair Value of Derivatives Designated as Hedge Instruments |
Fair Value of Derivatives Not Designated as Hedge Instruments |
Total Fair Value | |||||||||||||||
Derivative assets (1): |
|||||||||||||||||
Foreign exchange contracts |
$ | 1,332 | $ | 222 | $ | 1,554 | |||||||||||
Interest rate contracts |
$ | 81 | $ | 0 | $ | 81 | |||||||||||
Derivative liabilities (2): |
|||||||||||||||||
Foreign exchange contracts |
$ | 41 | $ | 40 | $ | 81 |
(1) | The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the Consolidated Balance Sheets. |
(2) | The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses in the Consolidated Balance Sheets. |
The following table shows the pre-tax gains and losses of the Companys derivative and non-derivative instruments designated as cash flow, net investment and fair value hedges on OCI and the Consolidated Statements of Operations for 2015, 2014 and 2013 (in millions):
2015 | 2014 | 2013 | ||||||||||
Gains/(Losses) recognized in OCI effective portion: |
||||||||||||
Cash flow hedges: |
||||||||||||
Foreign exchange contracts |
$ | 3,592 | $ | 1,750 | $ | 891 | ||||||
Interest rate contracts |
(111 | ) | (15 | ) | 12 | |||||||
|
|
|
|
|
|
|||||||
Total |
$ | 3,481 | $ | 1,735 | $ | 903 | ||||||
|
|
|
|
|
|
|||||||
Net investment hedges: |
||||||||||||
Foreign exchange contracts |
$ | 167 | $ | 53 | $ | 143 | ||||||
Foreign currency debt |
(71 | ) | 0 | 0 | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 96 | $ | 53 | $ | 143 | ||||||
|
|
|
|
|
|
|||||||
Gains/(Losses) reclassified from AOCI into net income effective portion: |
||||||||||||
Cash flow hedges: |
||||||||||||
Foreign exchange contracts |
$ | 4,092 | $ | (154 | ) | $ | 676 | |||||
Interest rate contracts |
(17 | ) | (16 | ) | (6 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 4,075 | $ | (170 | ) | $ | 670 | |||||
|
|
|
|
|
|
|||||||
Gains/(Losses) on derivative instruments: |
||||||||||||
Fair value hedges: |
||||||||||||
Interest rate contracts |
$ | 337 | $ | 39 | $ | 0 | ||||||
|
|
|
|
|
|
|||||||
Gains/(Losses) related to hedged items: |
||||||||||||
Fair value hedges: |
||||||||||||
Interest rate contracts |
$ | (337 | ) | $ | (39 | ) | $ | 0 | ||||
|
|
|
|
|
|
The following table shows the notional amounts of the Companys outstanding derivative instruments and credit risk amounts associated with outstanding or unsettled derivative instruments as of September 26, 2015 and September 27, 2014 (in millions):
2015 | 2014 | |||||||||||||||
Notional Amount |
Credit Risk Amount |
Notional Amount |
Credit Risk Amount |
|||||||||||||
Instruments designated as accounting hedges: |
||||||||||||||||
Foreign exchange contracts |
$ | 70,054 | $ | 1,385 | $ | 42,945 | $ | 1,333 | ||||||||
Interest rate contracts |
$ | 18,750 | $ | 394 | $ | 12,000 | $ | 89 | ||||||||
Instruments not designated as accounting hedges: |
||||||||||||||||
Foreign exchange contracts |
$ | 49,190 | $ | 109 | $ | 38,510 | $ | 222 |
Apple Inc. | 2015 Form 10-K | 52
The notional amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Companys exposure to credit or market loss. The credit risk amounts represent the Companys gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency or interest rates at each respective date. The Companys exposure to credit loss and market risk will vary over time as currency and interest rates change. Although the table above reflects the notional and credit risk amounts of the Companys derivative instruments, it does not reflect the gains or losses associated with the exposures and transactions that the instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The Company generally enters into master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with the same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company presents its derivative assets and derivative liabilities at their gross fair values in its Consolidated Balance Sheets. The net cash collateral received by the Company related to derivative instruments under its collateral security arrangements was $1.0 billion as of September 26, 2015 and $2.1 billion as of September 27, 2014.
Under master netting arrangements with the respective counterparties to the Companys derivative contracts, the Company is allowed to net settle transactions with a single net amount payable by one party to the other. As of September 26, 2015 and September 27, 2014, the potential effects of these rights of set-off associated with the Companys derivative contracts, including the effects of collateral, would be a reduction to both derivative assets and derivative liabilities of $2.2 billion and $1.6 billion, respectively, resulting in net derivative liabilities of $78 million and $549 million, respectively.
Accounts Receivable
Trade Receivables
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added resellers, small and mid-sized businesses and education, enterprise and government customers. The Company generally does not require collateral from its customers; however, the Company will require collateral in certain instances to limit credit risk. In addition, when possible, the Company attempts to limit credit risk on trade receivables with credit insurance for certain customers or by requiring third-party financing, loans or leases to support credit exposure. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements.
As of September 26, 2015, the Company had one customer that represented 10% or more of total trade receivables, which accounted for 12%. As of September 27, 2014, the Company had two customers that represented 10% or more of total trade receivables, one of which accounted for 16% and the other 13%. The Companys cellular network carriers accounted for 71% and 72% of trade receivables as of September 26, 2015 and September 27, 2014, respectively.
Vendor Non-Trade Receivables
The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these components directly from suppliers. Vendor non-trade receivables from three of the Companys vendors accounted for 38%, 18% and 14% of total vendor non-trade receivables as of September 26, 2015 and three of the Companys vendors accounted for 51%, 16% and 14% of total vendor non-trade receivables as of September 27, 2014.
Note 3 Consolidated Financial Statement Details
The following tables show the Companys consolidated financial statement details as of September 26, 2015 and September 27, 2014 (in millions):
Property, Plant and Equipment, Net
2015 | 2014 | |||||||
Land and buildings |
$ | 6,956 | $ | 4,863 | ||||
Machinery, equipment and internal-use software |
37,038 | 29,639 | ||||||
Leasehold improvements |
5,263 | 4,513 | ||||||
|
|
|
|
|||||
Gross property, plant and equipment |
49,257 | 39,015 | ||||||
Accumulated depreciation and amortization |
(26,786 | ) | (18,391 | ) | ||||
|
|
|
|
|||||
Total property, plant and equipment, net |
$ | 22,471 | $ | 20,624 | ||||
|
|
|
|
Apple Inc. | 2015 Form 10-K | 53
Other Non-Current Liabilities
2015 | 2014 | |||||||
Deferred tax liabilities |
$ | 24,062 | $ | 20,259 | ||||
Other non-current liabilities |
9,365 | 4,567 | ||||||
|
|
|
|
|||||
Total other non-current liabilities |
$ | 33,427 | $ | 24,826 | ||||
|
|
|
|
Other Income/(Expense), Net
The following table shows the detail of other income/(expense), net for 2015, 2014 and 2013 (in millions):
2015 | 2014 | 2013 | ||||||||||
Interest and dividend income |
$ | 2,921 | $ | 1,795 | $ | 1,616 | ||||||
Interest expense |
(733 | ) | (384 | ) | (136 | ) | ||||||
Other expense, net |
(903 | ) | (431 | ) | (324 | ) | ||||||
|
|
|
|
|
|
|||||||
Total other income/(expense), net |
$ | 1,285 | $ | 980 | $ | 1,156 | ||||||
|
|
|
|
|
|
Note 4 Goodwill and Other Intangible Assets
On July 31, 2014, the Company completed the acquisitions of Beats Music, LLC, which offers a subscription streaming music service, and Beats Electronics, LLC, which makes Beats® headphones, speakers and audio software (collectively, Beats). The total purchase price consideration for these acquisitions was $2.6 billion, which consisted primarily of cash, of which $2.2 billion was allocated to goodwill, $636 million to acquired intangible assets and $258 million to net liabilities assumed. Concurrent with the close of the acquisitions, the Company repaid $295 million of existing Beats outstanding debt to third-party creditors. In conjunction with the Beats acquisitions, the Company issued approximately 5.1 million shares of its common stock to certain former equity holders of Beats. The restricted stock was valued at approximately $485 million based on the Companys common stock on the acquisition date. The majority of these shares, valued at approximately $417 million, will vest over time based on continued employment with Apple.
The Company also completed various other business acquisitions during 2014 for an aggregate cash consideration, net of cash acquired, of $957 million, of which $828 million was allocated to goodwill, $257 million to acquired intangible assets and $128 million to net liabilities assumed.
The Companys acquired intangible assets with definite useful lives primarily consist of patents and licenses and are amortized over periods typically from three to seven years. The following table summarizes the components of gross and net intangible asset balances as of September 26, 2015 and September 27, 2014 (in millions):
2015 | 2014 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||
Definite-lived and amortizable acquired intangible assets |
$ | 8,125 | $ | (4,332 | ) | $ | 3,793 | $ | 7,127 | $ | (3,085 | ) | $ | 4,042 | ||||||||||
Indefinite-lived and non-amortizable acquired intangible assets |
100 | 0 | 100 | 100 | 0 | 100 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total acquired intangible assets |
$ | 8,225 | $ | (4,332 | ) | $ | 3,893 | $ | 7,227 | $ | (3,085 | ) | $ | 4,142 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to acquired intangible assets was $1.3 billion, $1.1 billion and $960 million in 2015, 2014 and 2013, respectively. As of September 26, 2015, the remaining weighted-average amortization period for acquired intangible assets is 3.6 years. The expected annual amortization expense related to acquired intangible assets as of September 26, 2015, is as follows (in millions):
2016 |
$ | 1,288 | ||
2017 |
1,033 | |||
2018 |
786 | |||
2019 |
342 | |||
2020 |
166 | |||
Thereafter |
178 | |||
|
|
|||
Total |
$ | 3,793 | ||
|
|
Apple Inc. | 2015 Form 10-K | 54
Note 5 Income Taxes
The provision for income taxes for 2015, 2014 and 2013, consisted of the following (in millions):
2015 | 2014 | 2013 | ||||||||||
Federal: |
||||||||||||
Current |
$ | 11,730 | $ | 8,624 | $ | 9,334 | ||||||
Deferred |
3,408 | 3,183 | 1,878 | |||||||||
|
|
|
|
|
|
|||||||
15,138 | 11,807 | 11,212 | ||||||||||
|
|
|
|
|
|
|||||||
State: |
||||||||||||
Current |
1,265 | 855 | 1,084 | |||||||||
Deferred |
(220 | ) | (178 | ) | (311 | ) | ||||||
|
|
|
|
|
|
|||||||
1,045 | 677 | 773 | ||||||||||
|
|
|
|
|
|
|||||||
Foreign: |
||||||||||||
Current |
4,744 | 2,147 | 1,559 | |||||||||
Deferred |
(1,806 | ) | (658 | ) | (426 | ) | ||||||
|
|
|
|
|
|
|||||||
2,938 | 1,489 | 1,133 | ||||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 19,121 | $ | 13,973 | $ | 13,118 | ||||||
|
|
|
|
|
|
The foreign provision for income taxes is based on foreign pre-tax earnings of $47.6 billion, $33.6 billion and $30.5 billion in 2015, 2014 and 2013, respectively. The Companys consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. Substantially all of the Companys undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of September 26, 2015, U.S. income taxes have not been provided on a cumulative total of $91.5 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be $30.0 billion.
As of September 26, 2015 and September 27, 2014, $186.9 billion and $137.1 billion, respectively, of the Companys cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35% in 2015, 2014 and 2013) to income before provision for income taxes for 2015, 2014 and 2013, is as follows (dollars in millions):
2015 | 2014 | 2013 | ||||||||||
Computed expected tax |
$ | 25,380 | $ | 18,719 | $ | 17,554 | ||||||
State taxes, net of federal effect |
680 | 469 | 508 | |||||||||
Indefinitely invested earnings of foreign subsidiaries |
(6,470 | ) | (4,744 | ) | (4,614 | ) | ||||||
Domestic production activities deduction |
(426 | ) | (495 | ) | (308 | ) | ||||||
Research and development credit, net |
(171 | ) | (88 | ) | (287 | ) | ||||||
Other |
128 | 112 | 265 | |||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 19,121 | $ | 13,973 | $ | 13,118 | ||||||
|
|
|
|
|
|
|||||||
Effective tax rate |
26.4% | 26.1% | 26.2% |
The Companys income taxes payable have been reduced by the tax benefits from employee stock plan awards. For stock options, the Company receives an income tax benefit calculated as the tax effect of the difference between the fair market value of the stock issued at the time of the exercise and the exercise price. For RSUs, the Company receives an income tax benefit upon the awards vesting equal to the tax effect of the underlying stocks fair market value. The Company had net excess tax benefits from equity awards of $748 million, $706 million and $643 million in 2015, 2014 and 2013, respectively, which were reflected as increases to common stock.
Apple Inc. | 2015 Form 10-K | 55
As of September 26, 2015 and September 27, 2014, the significant components of the Companys deferred tax assets and liabilities were (in millions):
2015 | 2014 | |||||||
Deferred tax assets: |
||||||||
Accrued liabilities and other reserves |
$ | 4,205 | $ | 3,326 | ||||
Basis of capital assets and investments |
2,238 | 898 | ||||||
Deferred revenue |
1,941 | 1,787 | ||||||
Deferred cost sharing |
667 | 0 | ||||||
Share-based compensation |
575 | 454 | ||||||
Unrealized losses |
564 | 130 | ||||||
Other |
721 | 227 | ||||||
|
|
|
|
|||||
Total deferred tax assets, net of valuation allowance of $0 |
10,911 | 6,822 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Unremitted earnings of foreign subsidiaries |
26,868 | 21,544 | ||||||
Other |
303 | 398 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
27,171 | 21,942 | ||||||
|
|
|
|
|||||
Net deferred tax liabilities |
$ | (16,260 | ) | $ | (15,120 | ) | ||
|
|
|
|
Deferred tax assets and liabilities reflect the effects of tax losses, credits and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Uncertain Tax Positions
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities in the Consolidated Balance Sheets.
As of September 26, 2015, the total amount of gross unrecognized tax benefits was $6.9 billion, of which $2.5 billion, if recognized, would affect the Companys effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would affect the Companys effective tax rate.
The aggregate changes in the balance of gross unrecognized tax benefits, which excludes interest and penalties, for 2015, 2014 and 2013, is as follows (in millions):
2015 | 2014 | 2013 | ||||||||||
Beginning Balance |
$ | 4,033 | $ | 2,714 | $ | 2,062 | ||||||
Increases related to tax positions taken during a prior year |
2,056 | 1,295 | 745 | |||||||||
Decreases related to tax positions taken during a prior year |
(345 | ) | (280 | ) | (118 | ) | ||||||
Increases related to tax positions taken during the current year |
1,278 | 882 | 626 | |||||||||
Decreases related to settlements with taxing authorities |
(109 | ) | (574 | ) | (592 | ) | ||||||
Decreases related to expiration of statute of limitations |
(13 | ) | (4 | ) | (9 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending Balance |
$ | 6,900 | $ | 4,033 | $ | 2,714 | ||||||
|
|
|
|
|
|
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of September 26, 2015 and September 27, 2014, the total amount of gross interest and penalties accrued was $1.3 billion and $630 million, respectively, which is classified as non-current liabilities in the Consolidated Balance Sheets. In connection with tax matters, the Company recognized interest and penalty expense in 2015, 2014 and 2013 of $709 million, $40 million and $189 million, respectively.
Apple Inc. | 2015 Form 10-K | 56
The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. Internal Revenue Service (the IRS) is currently examining the years 2010 through 2012, and all years prior to 2010 are closed. In addition, the Company is subject to audits by state, local and foreign tax authorities. In major states and major foreign jurisdictions, the years subsequent to 2003 generally remain open and could be subject to examination by the taxing authorities.
Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Companys tax audits are resolved in a manner not consistent with managements expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.
On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commissions assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of September 26, 2015 the Company is unable to estimate the impact.
Note 6 Debt
Commercial Paper
In 2014, the Board of Directors authorized the Company to issue unsecured short-term promissory notes (Commercial Paper) pursuant to a commercial paper program. The Company intends to use net proceeds from the commercial paper program for general corporate purposes, including dividends and share repurchases. As of September 26, 2015 and September 27, 2014, the Company had $8.5 billion and $6.3 billion of Commercial Paper outstanding, respectively, with a weighted-average interest rate of 0.14% and 0.12%, respectively, and maturities generally less than nine months.
The following table provides a summary of cash flows associated with the issuance and maturities of Commercial Paper for 2015 and 2014 (in millions):
2015 | 2014 | |||||||
Maturities less than 90 days: |
||||||||
Proceeds from (repayments of) commercial paper, net |
$ | 5,293 | $ | 1,865 | ||||
Maturities greater than 90 days: |
||||||||
Proceeds from commercial paper |
3,851 | 4,771 | ||||||
Repayments of commercial paper |
(6,953 | ) | (330 | ) | ||||
|
|
|
|
|||||
Maturities greater than 90 days, net |
(3,102 | ) | 4,441 | |||||
|
|
|
|
|||||
Total change in commercial paper, net |
$ | 2,191 | $ | 6,306 | ||||
|
|
|
|
Long-Term Debt
As of September 26, 2015, the Company had outstanding floating- and fixed-rate notes with varying maturities for an aggregate principal amount of $55.7 billion (collectively the Notes). The Notes are senior unsecured obligations, and interest is payable in arrears, quarterly for the U.S. dollar-denominated and Australian dollar-denominated floating-rate notes, semi-annually for the U.S. dollar-denominated, Australian dollar-denominated, British pound-denominated and Japanese yen-denominated fixed-rate notes and annually for the euro-denominated and Swiss franc-denominated fixed-rate notes.
Apple Inc. | 2015 Form 10-K | 57
The following table provides a summary of the Companys term debt as of September 26, 2015 and September 27, 2014:
2015 | 2014 | |||||||||||||||||||
Maturities | Amount (in millions) |
Effective Interest Rate |
Amount (in millions) |
Effective Interest Rate |
||||||||||||||||
2013 debt issuance of $17.0 billion: |
||||||||||||||||||||
Floating-rate notes |
2016 2018 | $ | 3,000 | 0.51% 1.10% | $ | 3,000 | 0.51% 1.10% | |||||||||||||
Fixed-rate 0.45% 3.85% notes |
2016 2043 | 14,000 | 0.51% 3.91% | 14,000 | 0.51% 3.91% | |||||||||||||||
2014 debt issuance of $12.0 billion: |
||||||||||||||||||||
Floating-rate notes |
2017 2019 | 2,000 | 0.37% 0.60% | 2,000 | 0.31% 0.54% | |||||||||||||||
Fixed-rate 1.05% 4.45% notes |
2017 2044 | 10,000 | 0.37% 4.48% | 10,000 | 0.30% 4.48% | |||||||||||||||
First quarter 2015 euro-denominated debt issuance of 2.8 billion: |
||||||||||||||||||||
Fixed-rate 1.000% notes |
2022 | 1,558 | 2.94% | 0 | 0 | |||||||||||||||
Fixed-rate 1.625% notes |
2026 | 1,558 | 3.45% | 0 | 0 | |||||||||||||||
Second quarter 2015 debt issuance of $6.5 billion: |
||||||||||||||||||||
Floating-rate notes |
2020 | 500 | 0.56% | 0 | 0 | |||||||||||||||
Fixed-rate 1.55% notes |
2020 | 1,250 | 0.56% | 0 | 0 | |||||||||||||||
Fixed-rate 2.15% notes |
2022 | 1,250 | 0.87% | 0 | 0 | |||||||||||||||
Fixed-rate 2.50% notes |
2025 | 1,500 | 2.60% | 0 | 0 | |||||||||||||||
Fixed-rate 3.45% notes |
2045 | 2,000 | 3.58% | 0 | 0 | |||||||||||||||
Second quarter 2015 Swiss franc-denominated debt issuance of SFr1.25 billion: |
||||||||||||||||||||
Fixed-rate 0.375% notes |
2024 | 895 | 0.28% | 0 | 0 | |||||||||||||||
Fixed-rate 0.750% notes |
2030 | 384 | 0.74% | 0 | 0 | |||||||||||||||
Third quarter 2015 debt issuance of $8.0 billion: |
||||||||||||||||||||
Floating-rate notes |
2017 | 250 | 0.36% | 0 | 0 | |||||||||||||||
Floating-rate notes |
2020 | 500 | 0.61% | 0 | 0 | |||||||||||||||
Fixed-rate 0.900% notes |
2017 | 750 | 0.35% | 0 | 0 | |||||||||||||||
Fixed-rate 2.000% notes |
2020 | 1,250 | 0.61% | 0 | 0 | |||||||||||||||
Fixed-rate 2.700% notes |
2022 | 1,250 | 0.99% | 0 | 0 | |||||||||||||||
Fixed-rate 3.200% notes |
2025 | 2,000 | 1.22% | 0 | 0 | |||||||||||||||
Fixed-rate 4.375% notes |
2045 | 2,000 | 4.40% | 0 | 0 | |||||||||||||||
Third quarter 2015 Japanese yen-denominated debt issuance of ¥250.0 billion: |
||||||||||||||||||||
Fixed-rate 0.35% notes |
2020 | 2,081 | 0.35% | 0 | 0 | |||||||||||||||
Fourth quarter 2015 British pound-denominated debt issuance of £1.25 billion: |
||||||||||||||||||||
Fixed-rate 3.05% notes |
2029 | 1,148 | 3.79% | 0 | 0 | |||||||||||||||
Fixed-rate 3.60% notes |
2042 | 766 | 4.51% | 0 | 0 | |||||||||||||||
Fourth quarter 2015 Australian dollar-denominated debt issuance of A$2.25 billion: |
||||||||||||||||||||
Floating-rate notes |
2019 | 493 | 1.87% | 0 | 0 | |||||||||||||||
Fixed-rate 2.85% notes |
2019 | 282 | 1.89% | 0 | 0 | |||||||||||||||
Fixed-rate 3.70% notes |
2022 | 810 | 2.79% | 0 | 0 | |||||||||||||||
Fourth quarter 2015 euro-denominated debt issuance of 2.0 billion: |
||||||||||||||||||||
Fixed-rate 1.375% notes |
2024 | 1,113 | 3.30% | 0 | 0 | |||||||||||||||
Fixed-rate 2.000% notes |
2027 | 1,113 | 3.85% | 0 | 0 | |||||||||||||||
|
|
|
|
|||||||||||||||||
Total term debt |
55,701 | 29,000 | ||||||||||||||||||
Unamortized discount |
(114 | ) | (52 | ) | ||||||||||||||||
Hedge accounting fair value adjustments |
376 | 39 | ||||||||||||||||||
Less: Current portion of long-term debt |
(2,500 | ) | 0 | |||||||||||||||||
|
|
|
|
|||||||||||||||||
Total long-term debt |
$ | 53,463 | $ | 28,987 | ||||||||||||||||
|
|
|
|
To manage foreign currency risk associated with the euro-denominated notes issued in the first quarter of 2015 and the British pound-denominated, Australian dollar-denominated and euro-denominated notes issued in the fourth quarter of 2015, the Company entered into currency swaps with an aggregate notional amount of $3.5 billion, $1.9 billion, $1.6 billion and $2.2 billion, respectively, which effectively converted these notes to U.S. dollar-denominated notes.
Apple Inc. | 2015 Form 10-K | 58
To manage interest rate risk on the U.S. dollar-denominated fixed-rate notes issued in the second quarter of 2015 and maturing in 2020 and 2022, the Company entered into interest rate swaps with an aggregate notional amount of $2.5 billion. To manage interest rate risk on the U.S. dollar-denominated fixed-rate notes issued in the third quarter of 2015 and maturing in 2017, 2020, 2022 and 2025, the Company entered into interest rate swaps with an aggregate notional amount of $4.3 billion. These interest rate swaps effectively converted the fixed interest rates on the U.S. dollar-denominated notes to a floating interest rate.
As of September 26, 2015, ¥250.0 billion of the Japanese yen-denominated notes was designated as a hedge of the foreign currency exposure of its net investment in a foreign operation. The foreign currency transaction gain or loss on the Japanese yen-denominated debt designated as a hedge is recorded in OCI as a part of the cumulative translation adjustment. As of September 26, 2015, the carrying value of the debt designated as a net investment hedge was $2.1 billion.
For further discussion regarding the Companys use of derivative instruments see the Derivative Financial Instruments section of Note 2, Financial Instruments.
The effective interest rates for the Notes include the interest on the Notes, amortization of the discount and, if applicable, adjustments related to hedging. The Company recognized $722 million, $381 million and $136 million of interest expense on its term debt for 2015, 2014 and 2013, respectively.
The future principal payments for the Companys Notes as of September 26, 2015 are as follows (in millions):
2016 |
$ | 2,500 | ||
2017 |
3,500 | |||
2018 |
6,000 | |||
2019 |
3,775 | |||
2020 |
5,581 | |||
Thereafter |
34,345 | |||
|
|
|||
Total term debt |
$ | 55,701 | ||
|
|
As of September 26, 2015 and September 27, 2014, the fair value of the Companys Notes, based on Level 2 inputs, was $54.9 billion and $28.5 billion, respectively.
Note 7 Shareholders Equity
Dividends
The Company declared and paid cash dividends per share during the periods presented as follows:
Dividends Per Share |
Amount (in millions) |
|||||||
2015: |
||||||||
Fourth quarter |
$ | 0.52 | $ | 2,950 | ||||
Third quarter |
0.52 | 2,997 | ||||||
Second quarter |
0.47 | 2,734 | ||||||
First quarter |
0.47 | 2,750 | ||||||
|
|
|
|
|||||
Total cash dividends declared and paid |
$ | 1.98 | $ | 11,431 | ||||
|
|
|
|
|||||
2014: |
||||||||
Fourth quarter |
$ | 0.47 | $ | 2,807 | ||||
Third quarter |
0.47 | 2,830 | ||||||
Second quarter |
0.44 | 2,655 | ||||||
First quarter |
0.44 | 2,739 | ||||||
|
|
|
|
|||||
Total cash dividends declared and paid |
$ | 1.82 | $ | 11,031 | ||||
|
|
|
|
Future dividends are subject to declaration by the Board of Directors.
Apple Inc. | 2015 Form 10-K | 59
Share Repurchase Program
In the third quarter of 2015, the Companys Board of Directors increased the share repurchase authorization to $140 billion of the Companys common stock, of which $104 billion had been utilized as of September 26, 2015. The Companys share repurchase program does not obligate it to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the Exchange Act).
The Company has entered, and in the future may enter, into accelerated share repurchase arrangements (ASRs) with financial institutions. In exchange for up-front payments, the financial institutions deliver shares of the Companys common stock during the purchase periods of each ASR. The total number of shares ultimately delivered, and therefore the average repurchase price paid per share, is determined at the end of the applicable purchase period of each ASR based on the volume weighted-average price of the Companys common stock during that period. The shares received are retired in the periods they are delivered, and the up-front payments are accounted for as a reduction to shareholders equity in the Companys Consolidated Balance Sheets in the periods the payments are made. The Company reflects the ASRs as a repurchase of common stock in the period delivered for purposes of calculating earnings per share and as forward contracts indexed to its own common stock. The ASRs met all of the applicable criteria for equity classification, and therefore were not accounted for as derivative instruments.
The following table shows the Companys ASR activity and related information during the years ended September 26, 2015 and September 27, 2014: