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0000320193
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20080201
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10-Q
| 369
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The Company’s reportable operating segments consist of the Americas, Europe, Japan, and Retail.
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0000320193
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10-Q
| 370
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The Americas, Europe, and Japan reportable segments do not include activities related to the Retail segment.
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0000320193
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20080201
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10-Q
| 371
|
The Americas segment includes both North and South America.
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10-Q
| 372
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The Europe segment includes European countries as well as the Middle East and Africa.
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10-Q
| 373
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The Retail segment operates Apple-owned retail stores in the U.S., Canada, Japan, the U.K. and Italy.
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10-Q
| 374
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Each reportable segment provides similar hardware and software products and similar services to the same types of customers.
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10-Q
| 375
|
Americas
Net sales in the Americas segment during the first quarter of 2008 increased $777 million or 22% compared to the first quarter of 2007, while Mac unit sales increased 35% year-over-year.
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0001193125-08-017426/full-submission.txt
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10-Q
| 376
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The increase in net sales is primarily attributable to higher sales of iMacs and Mac portable systems, Mac OS X Leopard and other software, and sales from the iTunes Store.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
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10-Q
| 377
|
During the first quarters of 2008 and 2007, the Americas segment represented 45% and 49%, respectively, of the Company’s total net sales.
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0001193125-08-017426/full-submission.txt
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10-Q
| 378
|
Europe
Net sales in Europe increased $759 million or 44% during the first quarter of 2008 as compared to the same quarter in 2007.
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10-Q
| 379
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Total Mac unit sales in Europe increased 44% on a year-over-year basis.
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10-Q
| 380
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These increases were mainly a result of strong growth in net sales of iMacs and Mac portable systems, iPods, Mac OS X Leopard and other software, and sales from the iTunes Store.
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0000320193
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10-Q
| 381
|
A weaker U.S. dollar also contributed to the increase in net sales.
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10-Q
| 382
|
Japan
Japan’s net sales and unit sales increased 40% and 30%, respectively, during the first quarter of 2008 compared to the same quarter in 2007.
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0000320193
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10-Q
| 383
|
The $115 million increase in net sales was primarily driven by strong sales of iPods and iMac, as well as the decline in the value of the U.S. dollar.
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0001193125-08-017426/full-submission.txt
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10-Q
| 384
|
Retail
Retail revenue grew by 53% year-over-year primarily due to a 64% increase in Mac unit sales, as well as higher sales of iPod and strong sales of iPhone.
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0000320193
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10-Q
| 385
|
The Company opened seven new retail stores during the first quarter of 2008, ending the quarter with 204 stores open compared to 170 stores at the end of the first quarter of 2007.
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0001193125-08-017426/full-submission.txt
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10-Q
| 386
|
With an average of 201 stores open during the first quarter of 2008, average revenue per store was $8.5 million, compared to $6.6 million in the first quarter of 2007.
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0001193125-08-017426/full-submission.txt
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0000320193
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10-Q
| 387
|
The Retail segment reported operating income of $405 million during the first quarter of 2008 compared to operating income of $259 million during the first quarter of 2007.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 388
|
The increased operating income in the first quarter of 2008 was attributable to higher sales and an increase in gross margin percentage due to favorable standard costs experienced by the Company overall, partially offset by increased spending on store remodeling and personnel.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 389
|
Expansion of the Retail segment has required and will continue to require a substantial investment in fixed assets and related infrastructure, operating lease commitments, personnel, and other operating expenses.
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10-Q
| 390
|
Capital asset purchases associated with the Retail segment since its inception totaled $1.1 billion through the end of the first quarter of 2008.
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0000320193
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20080201
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10-Q
| 391
|
As of December 29, 2007, the Retail segment had approximately 11,400 full-time equivalent employees and had outstanding lease commitments associated with retail space of $1.2 billion.
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20080201
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10-Q
| 392
|
The Company would incur substantial costs if it were to close multiple retail stores.
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|
10-Q
| 393
|
Such costs could adversely affect the Company’s financial condition and operating results.
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10-Q
| 394
|
Other Segments
The Company’s Other Segments, which consist of its Asia Pacific and FileMaker operations, experienced an increase in net sales of $256 million, or 53% during the first quarter of 2008 as compared to the same quarter in 2007.
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10-Q
| 395
|
This increase related primarily to strong growth in sales of both Mac desktop and portable products, as well as strong growth in iPod sales in the Company’s Asia Pacific region.
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10-Q
| 396
|
Gross Margin
Gross margin for the three months ended December 29, 2007 and December 30, 2006 was as follows (in millions, except gross margin percentages):
Gross margin percentage for the first quarter of 2008 was 34.7% compared to 31.2% for the first quarter of 2007.
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0001193125-08-017426/full-submission.txt
|
0000320193
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20080201
|
10-Q
| 397
|
The year-over-year increase in gross margin percentage during the first quarter of 2008 was primarily due to higher software sales, favorable costs of certain commodity components, favorable product mix, a weaker U.S. dollar and higher overall revenue resulting in more effective leverage on fixed production costs.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 398
|
The Company expects its gross margin percentage to decrease in the second quarter of 2008 from the first quarter of 2008.
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0000320193
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20080201
|
10-Q
| 399
|
The decrease in gross margin percentage is expected mainly from a decline in software sales as Mac OS X Leopard enters its second quarter and reduced leverage on fixed production costs due to expected seasonally lower revenue following the holiday season.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 400
|
The foregoing statements regarding the Company’s expected gross margin percentage are forward-looking and could differ from anticipated levels because of several factors, including certain of those set forth below in Part II, Item 1A, “Risk Factors.” There can be no assurance that current gross margin percentage will be maintained or targeted gross margin percentage levels will be achieved.
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0001193125-08-017426/full-submission.txt
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0000320193
|
20080201
|
10-Q
| 401
|
In general, gross margins and margins on individual products will remain under downward pressure due to a variety of factors, including continued industry wide global pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of components and outside manufacturing services, and a potential shift in the Company’s sales mix towards products with lower gross margins.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 402
|
In response to these competitive pressures, the Company expects it will continue to take pricing actions with respect to its products.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 403
|
Gross margins could also be affected by the Company’s ability to effectively manage product quality and warranty costs and to stimulate demand for certain of its products.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 404
|
Due to the Company’s significant international operations, financial results can be significantly affected in the short-term by fluctuations in exchange rates.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 405
|
Operating Expenses
Operating expenses for the three months ended December 29, 2007 and December 30, 2006 were as follows (in millions, except for percentages):
Research and Development (“R&D”)
Expenditures for R&D increased 34% or $62 million to $246 million in the first quarter of 2008 compared to $184 million in the first quarter of 2007 primarily due to an increase in R&D headcount in the current year to support expanded R&D activities.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 406
|
Although total R&D expense increased 34%, it remained flat at 3% of net sales given the 35% increase in revenue in the first quarter of 2008 as compared to the same period in 2007.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 407
|
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 enhanced products that are central to the Company’s core business strategy.
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|
10-Q
| 408
|
As such, the Company expects to make further investments in R&D to remain competitive.
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|
10-Q
| 409
|
Selling, General, and Administrative Expense (“SG&A”)
SG&A increased 34% or $246 million to $960 million in the first quarter of 2008 compared to $714 million in the first quarter of 2007.
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0000320193
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20080201
|
10-Q
| 410
|
This increase is primarily due to higher variable selling expenses resulting from the significant year-over-year increase in total net sales for the first quarter, the Company’s continued expansion of its Retail segment in both domestic and international markets, and higher spending on marketing and advertising.
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0001193125-08-017426/full-submission.txt
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20080201
|
10-Q
| 411
|
Other Income and Expense
Total other income and expense increased $74 million or 59% to $200 million during the first quarter of 2008 compared to $126 million in the first quarter of 2007.
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0000320193
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20080201
|
10-Q
| 412
|
This increase is primarily attributable to higher interest income from the larger cash and short-term investment balances despite lower investment yields resulting from declining market interest rates.
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0000320193
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20080201
|
10-Q
| 413
|
The weighted-average interest rate earned by the Company on its cash, cash equivalents and short-term investments decreased to 4.94% in the first quarter of 2008 from 5.25% in the first quarter of 2007.
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|
10-Q
| 414
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Provision for Income Taxes
The Company’s effective tax rate for the three months ended December 29, 2007 was approximately 32% compared with approximately 31% for the quarter ended December 30, 2006.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 415
|
The Company’s effective rate for both periods differs from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 416
|
The Internal Revenue Service (“IRS”) has completed its field audit of the Company’s federal income tax returns for the years 2002 through 2003 and proposed certain adjustments.
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|
10-Q
| 417
|
The Company intends to contest certain of these adjustments through the IRS Appeals Office.
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10-Q
| 418
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In addition, the Company is subject to audits by state, local, and foreign tax authorities.
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10-Q
| 419
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Management believes that adequate provision has been made for any adjustments that may result from tax examinations.
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10-Q
| 420
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However, the outcome of tax audits cannot be predicted with certainty.
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|
10-Q
| 421
|
Should any issues addressed in the Company’s tax audits be resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 422
|
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
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0000320193
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10-Q
| 423
|
157, Fair Value Measurements, (“SFAS No.
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0000320193
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20080201
|
10-Q
| 424
|
157”) which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements.
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|
10-Q
| 425
|
SFAS No.
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10-Q
| 426
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157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements.
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10-Q
| 427
|
SFAS No.
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20080201
|
10-Q
| 428
|
157 is effective for fiscal years beginning after November 15, 2007 and will be adopted by the Company beginning in the first quarter of fiscal 2009.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 429
|
Although the Company will continue to evaluate the application of SFAS No.
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10-Q
| 430
|
157, management does not currently believe adoption will have a material impact on the Company’s financial condition or operating results.
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0000320193
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20080201
|
10-Q
| 431
|
In February 2007, the FASB issued SFAS No.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 432
|
159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 433
|
115 (“SFAS No.
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10-Q
| 434
|
159”).
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10-Q
| 435
|
SFAS No.
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20080201
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10-Q
| 436
|
159 allows companies to choose to elect measuring eligible financial instruments and certain other items at fair value that are not required to be measured at fair value.
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0000320193
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|
10-Q
| 437
|
SFAS No.
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20080201
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10-Q
| 438
|
159 requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each reporting date.
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0000320193
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20080201
|
10-Q
| 439
|
SFAS No.
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0000320193
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20080201
|
10-Q
| 440
|
159 is effective for fiscal years beginning after November 15, 2007 and will be adopted by the Company beginning in the first quarter of fiscal 2009.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
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10-Q
| 441
|
Although the Company will continue to evaluate the application of SFAS No.
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0000320193
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10-Q
| 442
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159, management does not currently believe adoption will have a material impact on the Company’s financial condition or operating results.
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0000320193
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10-Q
| 443
|
In December 2007, the FASB issued SFAS No.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
|
10-Q
| 444
|
141 (revised 2007), Business Combinations, (“SFAS No.
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0000320193
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20080201
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10-Q
| 445
|
141R”) which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree in a business combination.
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20080201
|
10-Q
| 446
|
SFAS No.
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10-Q
| 447
|
141R also establishes principles around how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial impact of the business combination.
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20080201
|
10-Q
| 448
|
SFAS No.
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20080201
|
10-Q
| 449
|
141R is effective for fiscal years beginning after December 15, 2008 and will be adopted by the Company beginning in the first quarter of fiscal 2010.
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0001193125-08-017426/full-submission.txt
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0000320193
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20080201
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10-Q
| 450
|
Although the Company will continue to evaluate the application of SFAS No.
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0000320193
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10-Q
| 451
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141R, management does not currently believe adoption will have a material impact on the Company’s financial condition or operating results.
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0000320193
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10-Q
| 452
|
Liquidity and Capital Resources
The following table presents selected financial information and statistics for each of the fiscal quarters ended on the dates indicated (dollars in millions):
As of December 29, 2007, the Company had $18.4 billion in cash, cash equivalents, and short-term investments, an increase of $3.1 billion over the same balance at the end of September 29, 2007.
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| 453
|
The principal components of this net increase were cash generated by operating activities of $2.8 billion, proceeds from the issuance of common stock under stock plans of $179 million, and excess tax benefits from stock-based compensation of $315 million.
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10-Q
| 454
|
These increases were partially offset by purchases of property, plant, and equipment of $224 million.
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10-Q
| 455
|
The Company’s short-term investment portfolio is primarily invested in highly-rated securities.
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10-Q
| 456
|
As of December 29, 2007 and September 29, 2007, $8.0 billion and $6.5 billion, respectively, of the Company’s cash, cash equivalents, and short-term investments were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings.
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0000320193
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20080201
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10-Q
| 457
|
The Company believes its existing balances of cash, cash equivalents, and short-term investments 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.
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10-Q
| 458
|
Capital Assets
The Company’s cash payments for capital asset purchases were $224 million during the first quarter of 2008, consisting of approximately $75 million for retail store facilities and $149 million for corporate infrastructure, including information systems enhancements.
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10-Q
| 459
|
The Company currently anticipates it will utilize approximately $1.25 billion for capital asset purchases during 2008, including approximately $400 million for expansion of the Company’s Retail segment, and approximately $850 million to support normal replacement of existing capital assets, including manufacturing related equipment and enhancements to general information technology infrastructure.
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0000320193
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20080201
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10-Q
| 460
|
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.
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0001193125-08-017426/full-submission.txt
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0000320193
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10-Q
| 461
|
Lease Commitments
As of September 29, 2007, the Company had total outstanding commitments on noncancelable operating leases of approximately $1.4 billion, $1.1 billion of which related to the lease of retail space and related facilities.
|
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0000320193
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20080201
|
10-Q
| 462
|
The Company’s major facility leases are generally for terms of 3 to 15 years and generally provide renewal options for terms of 3 to 7 additional years.
|
0001193125-08-017426/full-submission.txt
|
0000320193
|
20080201
|
10-Q
| 463
|
Leases for retail space are for terms of 5 to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options.
|
0001193125-08-017426/full-submission.txt
|
0000320193
|
20080201
|
10-Q
| 464
|
Total outstanding commitments on noncancelable operating leases related to the lease of retail space increased to $1.2 billion as of December 29, 2007.
|
0001193125-08-017426/full-submission.txt
|
0000320193
|
20080201
|
10-Q
| 465
|
Purchase Commitments with Contract Manufacturers and Component Suppliers
The Company utilizes several contract manufacturers to manufacture sub-assemblies for the Company’s products and to perform final assembly and test of finished products.
|
0001193125-08-017426/full-submission.txt
|
0000320193
|
20080201
|
10-Q
| 466
|
These contract manufacturers acquire components and build product based on demand information supplied by the Company, which typically covers periods ranging from 30 to 150 days.
|
0001193125-08-017426/full-submission.txt
|
0000320193
|
20080201
|
10-Q
| 467
|
The Company also obtains individual components for its products from a wide variety of individual suppliers.
|
0001193125-08-017426/full-submission.txt
|
0000320193
|
20080201
|
10-Q
| 468
|
Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information.
|
0001193125-08-017426/full-submission.txt
|
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